Interesting to read in the Financial Times this week that the Pensions Regulator has decided to intervene in the setting of the funding plan for the current ongoing actuarial valuation of the BT pension scheme and that it has appointed a firm of actuaries to advise it. The discussions will be mainly centred around the choice of the discount rate used to calculate the actuarial value of the accrued benefits (aka the ‘technical provisions’). Comparing this with the market value of the assets gives the funding shortfall or deficit. The higher the discount rate, the better the funding position and the lower the level of contributions BT will have to pay.
Presumably the Regulator thinks that the discount rate discussions between BT and the pension scheme trustees may lead to a funding plan which the Regulator may view as not prudent enough.
The Regulator recently held a number of workshops at various locations around the UK to spell out how it expects companies and trustees to engage in setting funding plans, particularly in the current economic climate where many companies are going through tough times. It subsequently posted this statement on its website. Even when companies are in financial distress, the Regulator expects funding plans to be prudent (in particular using cautious i.e. low discount rates). However, more realism can be built into recovery plans (i.e. the contribution arrangements to eliminate deficits) to reflect the company’s ability to pay and to take account of the trustees’ investment strategy, even if the target date to attain a full funding position stretches well into the future.
In the current financial climate the Regulator is likely to be having many tough discussions where they view ‘agreed’ funding plans are not good enough.
The Regulator may appoint independent actuaries, as in the BT case, so it could be valuable for companies to take their own actuarial advice independent of the actuarial advisors to the trustees to ensure that there is a balanced debate and outcome.