On the go: A defined benefit pension scheme has committed to stop dividend payments for six years and shortened its recovery plan length as part of a suite of improvements following intervention by the Pensions Regulator.
The case study shows how the regulator is taking a stricter approach to scheme funding, as outlined in its annual funding statement.
Its latest Compliance and Enforcement Bulletin, published on Thursday, included information about positive outcomes and cases over the past quarter as a result of regulatory involvement.
One anonymous case study describes how TPR identified a DB scheme as having a funding risk due to the low level of agreed deficit recovery contributions and the length of the proposed recovery plan – which was initially more than 13 years.
Over the years, funds had been taken from the employer and moved to another company in the employer group, and sales and profitability were deteriorating, raising regulatory concerns over covenant risk.
Moreover, the covenant advice had been put together by an in-house finance expert, rather than an independent covenant adviser. The in-house experts had rated the covenant as strong.
There were also governance issues. The trustee board included the company’s HR director and finance director and the watchdog found evidence of a lack of robust recovery plan negotiations.
It first intervened with a general information request letter, leading to a meeting with the trustees and scheme actuary. It then sent a further letter outlining its concerns, expectations and a set of actions.
As a result of TPR’s intervention, the scheme put a professional chair of trustees in place. The covenant was re-rated from strong to tending to weak, the recovery plan was cut to almost half the original length and an upfront payment of £10m was made, with £3.7m a year – up from £2m a year – in DRCs thereafter.
There was also an increased technical provisions deficit, and the employer provided the scheme with first ranking security over its properties and a PPF-compliant evergreen s75 guarantee of £18m.
The bulletin also lists several other regulatory achievements from January to March 2019, including the highest fine handed by TPR to a trustee, and the first custodial sentence resulting from TPR prosecution.
