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5% of U.K. pension plans could suffer from sponsoring employer’s unprofitability

One in 20 U.K. corporate defined benefit funds has a weak funding ratio due to market conditions such as low bond yields, leading to increased liabilities and large deficits, said The Pensions Regulator's latest annual funding statement.

Published Monday, the annual funding statement looked at pension plans' funding for the year ending Sept. 21, 2017, and found about 5% of plans in this valuation cycle have an employer that is unprofitable and vulnerable to a down economic cycle, making them unable to adequately support the pension plan, the regulator said in the statement.

TPR said pension fund trustees with weak funding ratios should report to the regulator that they have taken appropriate steps to address the issue. “To reach the best possible funding outcome, the trustees of stressed schemes need to fully evidence to us that they have taken appropriate measures such as closing a stressed scheme to future accrual or test the strength of the employer covenant to support scheme (against) risks.”

Other steps named by the regulator include identification of risks and improved ability to control them, terminating the pension fund where possible and maximizing non-cash support from the employer.

The regulator's analysis showed that although most major asset classes have performed well, which increased asset values, it was not to a level that would compensate fully for the increased liabilities. Many plans, therefore, showed larger funding deficits than projected in their last valuation, the regulator said.

Darren Redmayne CEO of Lincoln Pensions, a risk division of Cardano, commented on the funding statement in an email note: “The time is drawing near where, as with credit ratings being publicly available, the strength of the sponsor covenant should be available to members rather than a private rating only seen by the trustees.”

The report is available on TPR's website.