Navigating the endgame

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In its most recent funding statement, The Pensions Regulator indicated that it will be focused on ensuring DB schemes have an appropriate long-term funding target.  It will also be looking at company dividends paid (and other forms of “covenant leakage”) against the deficit contributions being paid to the pension scheme with a view to ensuring “equitable treatment” between shareholders and pension scheme members.

We also expect the consultation due in the summer, to look at potential tramlines for acceptable funding assumption ranges and recovery plan lengths and a “comply or explain” regulatory regime.

It is now vital that companies sponsoring DB pension schemes begin the process of identifying a robust, achievable and stress-tested long-term target for their scheme, together with a journey plan for getting there, to agree with the scheme trustees.  There are several reasons for this:

• Identifying a long-term target and methodology for settling members’ benefits is good risk management
• Better integration of pension scheme funding and wider business investment decisions
• Compliance with the regulatory focus resulting in a smoother process
• Enables companies to better defend any deemed “unequitable treatment” between shareholders and the pension scheme (our research indicates that 96% of FTSE350 companies pay more in dividends than deficit contributions).