Regulator warns pension trustees

There are problems ahead for pension schemes, says the regulator

Pension fund trustees have been warned to keep careful watch on the health of their schemes' investments because of the recent fall in financial markets.

The Pensions Regulator says trustees, employers and members will be greatly concerned by the downturn.

It warns trustees to be "vigilant", and in particular to keep an eye on the solvency of their employers.

But it says there is little evidence of any schemes losing money by directly investing in "toxic assets".

"The main issues faced by pension schemes are likely to be firstly the more general fall in asset values, and secondly the emerging pressures on company covenants and ultimately solvency," said the regulator.

"While a few individual pension schemes may have higher levels of exposure, we have not been informed of any significant problems and we do not believe the issue is systemic," it adds.

Big deficits

This is the first time since the regulator was established in 2005 that it has issued a general warning to trustees about financial dangers to their schemes' investments.

Describing this year's international banking crisis and stock market falls as "unprecedented times", it predicts that more schemes are going to fall into deficit, and may take longer to recover than before.

And it warns that employers will find it harder to make good those deficits with extra payments.

"Recovery plans arriving in 2009 may show larger deficits and weaker covenants due to the current economic difficulties," it says.

"This ...may result in longer recovery periods being proposed, recognising the emerging pressures on company cash flows and thus affordability."

A leading firm of actuaries said this amounted to advice to trustees not to put too much pressure on employers to make good any deficits when times were tough.

"The recent economic turmoil may eventually require employers to pay more money into their pension funds - assuming that things do not recover in the medium term," James Riley of Watson Wyatt.

"However, with revenues down and borrowing costs up, the Regulator doesn't want trustees to push companies over the edge by demanding more money than can be afforded in the current climate," he added.

Money purchase

Figures recently published by the Pension Protection Fund showed that the UK's nearly 7,800 private sector final salary pension schemes had a collective deficit in September of £80bn.

That was £43bn worse than just the month before, in August, and was far worse than a year ago when the schemes had a collective surplus of £75bn.

The regulator also emphasises the responsibility of scheme trustees towards members saving in money purchase, or defined benefit, sections, in which their accumulated pension money may have suffered a sudden and large fall.

"Trustees of defined benefit schemes should have clear and appropriate processes in place for members approaching retirement," it says.

"This is very important for members approaching their target retirement age at this point in the economic cycle."