Regulatory update on funding issues Fiona Frobisher October 2009

1. Regulatory update on funding issuesFiona FrobisherOctober 2009

2. Agenda • Scheme Funding Framework • Robust Technical Provisions • Flexible Recovery Plans • Risk Transfers • TPR’s approach to cases • What you can do

3. Scheme Funding Framework

4. All schemes must perform a triennial valuation The process for trustees takes up to 15 months …ROUND 1… ROUND 2… Tranche 1 schemes 22/9/05 – 21/9/06 Recovery Plans Dec 06 – Dec 07 Tranche 1 schemes 22/9/08 – 21/9/09 Recovery Plans Dec 09 – Dec 10 Tranche 2 schemes 22/9/06 – 21/9/07 Recovery Plans Dec 07 – Dec 08 Tranche 2 schemes 22/9/08 – 21/9/09 Tranche 3 schemes 22/9/07 – 21/9/08 Recovery Plans Dec 08 – Dec 09 …DEALT WITH… ...CURRENT… …FUTURE… Sept 05 Sept 06 Sept 07 Sept 08 Sept 09 Sept 10

5. Funding has weakened

6. And many employer covenants have weakened: Real GDP quarterly growth: Source ONS

7. Robustness versus flexibility • Technical provisions: • must be robust; • need to reflect the situation as it really is, not as we may like it to be. • However: • Recovery plans can be flexible if needed.

8. Robust Technical Provisions

9. Assumptions and employer covenant High Strong Some Covenant Risk level of assumptions Prudence Little or none Low Weak

10. Employer covenant • Employers legal obligation, ability and willingness to support the scheme • Employer stands behind payments to cover: • ongoing payments; • appropriate scheme expenses • deficit repair; • underperformance

11. TPs + covenant = self-sufficiency Technical provisions Assets RP Employer Covenant Self-sufficiency level of funding

12. TPs + covenant = self-sufficiency Technical provisions Assets RP Employer Covenant Self-sufficiency level of funding

13. Flexible Recovery plans

14. Flexibility in recovery plans Recovery plans should reflect what is possible and reasonably affordable….. • but members should not be disadvantaged by terms of plan Considerations for flexibility • Additional security to support longer plans • Contingent assets • Parental guarantees • Back-end loading • Step up payments once cash constraints cease • Agree profit share over and above flat rate payments

15. Example of a flexible recovery plan Deficit = £14 million Company cash-constrained; reasonable expectations of recovery in year 4. Payments £1 million yrs 1-4 Payments £1.5 million yrs 5-8 Payments £2 million yrs 9-10 In addition: If company reaches certain triggers e.g. profit of over £1 million a year it will pay 25% profit a year to pension scheme.

16. Risk Transfers

17. The regulator’s role in management of pension risk transfer We welcome innovation in the market but our focus remains on protecting member benefits and reducing calls to PPF • Such transitions can introduce new risks • Where risk is transferred to another entity need to ensure no reduction in member security • Where risk is transferred to individual member need to be properly informed of risks and costs • Rather than a risk transfer being a one-off, often part of a phased/ blended solution

18. Our approach; your approach

19. TPR approach to funding cases • Work with employers, trustees who need to revise recovery plans • Where recovery plans trigger we will be particularly concerned by those that show a drop in prudence • Welcome recovery plans with additional security • We are happy to discuss issues around corporate transactions, the earlier we are involved in the process the more we can help • We have powers – but most cases are settled before they are used

20. What you can do: Work with the trustees: • Understand your position • Communicate openly • Start early • Ask the right questions

21. Thank you