Page last updated at 12:43 GMT, Wednesday, 18 February 2009

Watchdog issues pensions warning

Two men discuss their pensions
Numerous final salary pension schemes are in deficit

Employers must not use the downturn as an excuse to cut pension contributions while still paying dividends to shareholders, says a watchdog.

The UK Pensions Regulator said economic conditions were of "real concern" to employers with final salary schemes.

But it warned that while they could have some breathing space they must still treat trustees fairly.

The latest estimate of total company pension deficits is 191bn, much worse than deficits of 49bn a year ago.

'Real concern'

Earlier in February, the Pension Protection Fund (PPF) - the official pension scheme safety net - said 90% of the nearly 7,800 schemes it measured were in the red, with only 812 schemes - 10% - still in surplus.

The pension scheme recovery plan should not suffer, for example, in order to enable companies to continue paying dividends to shareholders
David Norgrove, Pensions Regulator chairman

A separate survey suggested that 25% of major private sector firms expected to close their final salary pension schemes to existing members in the next few years.

The Regulator's statement recognised the difficulties for many of these employers, but stressed struggling pension schemes should not bring companies down.

"There is no reason why a pension scheme deficit should push an otherwise viable employer into insolvency," said David Norgrove, chairman of the Pensions Regulator.

The statement said that when a company was under pressure there was potential to renegotiate previously agreed plans to repair pension deficits.

These "recovery plans" often mean that over a period of about 10 years, employers make additional contributions to ensure the pension scheme can pay the benefits it promised. Any plan that took more than 10 years would face greater scrutiny from the watchdog.

Trustees should understand what was affordable for the employer, the regulator said.

But it stressed that trustees of a scheme in deficit were like unsecured creditors, and so they should be treated fairly.

"The pension scheme recovery plan should not suffer, for example, in order to enable companies to continue paying dividends to shareholders," said Mr Norgrove.

Fresh warning

The guidance has been welcomed by some in the industry.

"It is a healthy dose of realism saying that companies can't pay what they have not got. It is not a green light to stop funding schemes but it gives employers some breathing room," said David Saunders, partner at pensions law firm Sackers.

Marc Hommel, partner at PricewaterhouseCoopers, said employers should be honest about the situation.

"Employers need to be far more assertive in helping trustees understand cash constraints. Trustees tend to ask for more than is affordable when the employer has not engaged them early or openly enough," he said.

"The greatest security for a pension scheme is a strong and viable employer."

The Regulator's statement to employers with final salary pension schemes is the second of its kind in recent months.

In October, it issued a general warning to trustees about financial dangers to their schemes' investments. This was the first such statement since the regulator was established in 2005.

But in the autumn, the regulator said there was little evidence of any schemes losing money by directly investing in "toxic assets".

It stressed again that any employer that felt a recovery plan for an underfunded pension scheme would put the future health of the entire company at risk should discuss the scheme with trustees and the regulator.

High profile company failures, such as Woolworth, have put more pressure on the safety net for pension schemes.

The likelihood of a rise in insolvencies as the recession continues will add more schemes to those being taken on by the PPF.

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