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Analysis of the defined benefit funding regime

On 10 October 2012, The Pensions Regulator published a report entitled "The defined benefit regime: evidence and analysis".  This report sets out further information and analysis following an earlier statement from The Regulator on "Pension scheme funding in the current environment".  In particular, it details the way pension schemes have made use of "flexibilities" in the funding regime, including discount rates, recovery plans and contingent assets.

The report notes that the average recovery period for schemes in the current valuation cycle has increased by approximately 4.7 years from their original end date. In a recent speech to the pensions industry, Michael O'Higgins, chairman of The Pensions Regulator, stated that there is no upper limit to recovery plan lengths; what is appropriate will depend on the individual circumstances of the scheme.

In addition, the report highlights that the number of contingent assets has increased approximately seven-fold over the six years to 2011/12. 20% of schemes with effective valuation dates in the September 2009 to September 2010 period reported using at least one contingent asset.

The Pensions Regulator has indicated that changes to the regime "across the board" to reflect current conditions would not be justified, and that flexibilities should be targeted for schemes facing affordability issues.  The results of its research show that, of the schemes currently undertaking valuations and scheme funding discussions, about 25% would need either to make large increases in their deficit recovery contributions or make more substantial use of these flexibilities.  The Pensions Regulator acknowledges that a "significant minority" of schemes will be under particular strain and may need to make maximum use of the available flexibilities, but warns against taking "disproportionate risks" with members' benefits.