Employers allowed to renegotiate pension fund deficit payments

Employers battling to repair pensions deficits may be able to renegotiate their repayment plans, according to new guidance issued by The Pensions Regulator (TPR).

TPR has recognised that in the current economic climate it needs to apply the scheme funding system pragmatically and may need to renegotiate previously agreed plans.

David Norgrove, chairman of TPR, said: “There is no reason why a pension scheme deficit should push an otherwise viable employer into insolvency.”

However he warned the pension scheme recovery plan should not suffer, for example, in order to enable companies to continue paying dividends to shareholders.

David Saunders, a partner at Sacker and Partners described it as a helpful note of realism on the part of The Pensions Regulator.

“Employers cannot pay what they haven’t got. But it’s not a green light to cut back on pensions spending whilst maintaining “business as normal” with other stakeholders. The Regulator clearly expects everyone to share the pain,” said Saunders.

In addition, the guidance says:

  • trustees should be aware of what employers can reasonably afford to pay into the pension scheme.
  • employers should treat the scheme equitably, as with all unsecured creditors, and the pension scheme should be not disadvantaged.
  • the current funding scheme is flexible enough to cope with the demands of the current climate.
  • TPR will continue to apply the flexibility in the scheme funding system pragmatically, looking for outcomes in the best interests of both the scheme and its sponsor.

Pensions experts have welcomed the guidance as a common sense approach to the current climate

Nigel Peaple, director of policy at the National Association of Pension Funds, said: “We welcome the Pensions Regulator’s common sense approach.

“It is a step forward and provides further recognition that pension trustees and employer sponsors are now operating in a very difficult economic environment.”

While Norton Rose LLP comments: “Some commentators are disappointed that TPR has not taken additional steps to help trustees and scheme sponsors, such as extending the trigger point at which TPR conducts further investigations into a scheme’s funding and recovery plan from 10 to 15 years.†

“It is also possible that any significant future action by TPR to prevent companies paying dividends to shareholders rather than boosting their pension schemes could lead to further stock market falls and, ultimately, increased scheme deficits.”

However, some say that the clampdown on bankers’ bonuses could be good news for pension schemes. Gary Tansley, Consultant at HamishWilson, explained: “The Pensions Regulator’s recent statement to employers sponsoring DB pension schemes indicated that he does not expect to see recovery plans compromised to enable the payment of dividends to shareholders.†

“In addition to questioning employers about their dividend policies, we believe trustees should be asking employers about their plans for paying discretionary bonuses.”

Tansley added: “It is paradoxical that the payment of dividends, which to a large extent end up in other pension schemes’ coffers, can be subject to the Regulator’s Clearance procedures whereas employers have a free hand to pay bonuses to members of staff.Both result in cash being paid out of the business to the potential detriment of the employer’s covenant and the security it affords to the pension scheme and members’ benefits.

“What is bad news for bankers may turn out to be good news for the banks’ pension schemes and their members. Other schemes will benefit too if the clampdown crosses over into other industry sectors.”