Pension funds that cannot afford to take higher risk to help plug growing deficits should turn to their employer for increased contributions, so they do not have to extend their recovery plan end date, said The Pensions Regulator.
However, in its 2015 annual funding statement, which sets out its analysis of current market conditions and funding plans, the U.K.’s TPR said this is achievable only if increased support from a sponsoring employer does not undermine sustainable business growth.
“Employers need to be able to invest in the sustainable growth of their business,” said TPR’s statement. “In most cases employers are able to do so and afford the contributions required to appropriately fund the scheme.”
Should investment in business be prioritized over increasing contributions to the pension fund, “it is important that this investment is being used to improve the employer’s covenant,” it said.
TPR said all major asset classes performed well and contributions to reduce the deficit totaled about £44 billion ($69.3 billion) over the past three years.
However, its analysis suggests many pension funds completing 2015 valuations will still have “larger funding deficits due to the impact of falling interest rates and schemes not being fully hedged against this risk.”
Those pension funds that can take additional risks can address higher deficits by changes to their funding strategies, said TPR, such as “a modest extension to their recovery plans, a modest increase in deficit repair contributions and/or changing their assumptions relating to investment returns.”
“Our annual funding statement should give confidence to employers that supporting DB schemes is not a barrier to investing in their business, and that for trustees, taking an integrated and proportionate approach to managing risks can help a scheme improve its own situation over the longer term,” said Stephen Soper, executive director for defined benefit at TPR, in a news release accompanying the funding statement.