DB deficits are bigger than expected
The Pensions Regulator (TPR) has warned that many defined benefit (DB) schemes may have bigger funding deficits than expected.
In its annual funding statement released today, the TPR said that low interest rates coupled with global concerns over assets, have meant that schemes could have worse deficits than expected.
‘Our analysis suggests that as a result, many schemes will have larger funding deficits than previously predicted,’ the report said.
In the TPR’s analysis, it said that for most DB schemes, the value of liabilities is likely to have increased quicker than assets since the last valuation.
‘The increase in deficits could be in the region of 20-35%, depending on the scheme’s valuation date and hedging strategy,’ the report said.
The report noted that recent ‘significant financial market volatility’, has had an impact on scheme’s funding. It also anticipated that schemes will base their funding strategies based on low investment returns for the immediate future.
‘Given the current market conditions and expectations for the medium to longer term, all else being equal, we would expect that most schemes will set funding strategies based on lower [than] expected investment returns from most asset classes than at their last valuation,’ the report said.
The TPR report said that this high deficit will mean schemes will have to alter their recovery plans.
But the report did find that there could be enough ‘affordability for the schemes to increase contributions so that their existing recovery plan end date can be maintained’.
Andrew Warwick-Thompson, executive director of regulatory policy at the TPR, said trustees and employers must cooperate to ensure the right recovery plans are in place.
‘Schemes’ deficits are likely to have increased in many cases,’ he said.
‘Trustees and employers will need to work together in adjusting their recovery plans and putting in place an integrated risk management plan that reflects a common understanding of the schemes risks and the employer’s ability to underwrite those risks. Our guidance on integrated risk management will help them to do this.’
The report from the TPR follows the regulator being grilled by MPslast week over its handling over the British Homes Stores case.
Following this, former pensions minister Steve Webb warned MPs there are ‘many hundreds of zombie [DB] schemes’, where there is no realistic chance the pension deficits will be met.
(Jack Gilbert, CityWire)