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Trustees must heed Pensions Regulator warnings on funding and late valuations, says expert

Out-Law Legal Update | 03 Aug 2017 | 3:20 pm | 1 min. read

LEGAL UPDATE: The Pensions Regulator will take a more robust approach to defined benefit scheme valuations, intervening earlier, and will take tougher action on trustees who submit scheme valuations late.

In its annual funding statement (12-page / 104KB PDF) for defined benefit schemes the Pensions Regulator said it would intervene more often early on in funding negotiations.  The new stance could have a significant impact on the outcome of those negotiations, and trustees and employers will need to prepare themselves.

It also said that it would take a tough stand against trustees who submit scheme valuations late.  It now expects trustees who think they may miss a deadline to explain the causes of the delay and to work to a clear, agreed timetable.  The Regulator is more likely to take action against trustees who should have predicted the delay but who did not get in touch early on. Around 10% of DB schemes submitted their valuations late in 2016. 

The Regulator has already sent letters threatening trustees with enforcement action if they fail to submit valuations on time. Trustees must take these letters seriously, and carefully record all the actions they take to reach an agreement with the employer.

The Regulator's stance could have the unintended consequence of pressurising trustees into doing deals with employers which may not be in the best interests of the scheme, but which ensure deadlines are met. Funding negotiations can already be difficult and stressful.  Some employers may simply refuse to budge.  Additional pressure may not be helpful.

The Regulator also said that it would act where an employer pays more to shareholders than it does in deficit reduction contributions. In these cases the Regulator will expect a short recovery plan and an appropriate investment strategy.  The aim is to strike a fair balance between the pension scheme and the employer's shareholders.

It may seem reasonable to expect parity between pension contributions and dividends, but reductions in dividends could lead to shareholders pulling out, putting both business growth and the pension scheme at risk.  Trustees will need to assess business evidence with care, and be prepared to explain their reasoning to the Regulator.

Simon Tyler is a pensions expert at Pinsent Masons, the law firm behind Out-Law.com