Regulator flags DLR case to tackle inaction on late valuations

Difficulties encountered by both parties during triennial valuations can prevent agreement being reached and ultimately lead to schemes failing to meet their statutory valuation deadlines.

For the first time, the regulator last week published a section 89 report – which details how the regulator acts in particular cases – relating to a scheme funding decision.

It outlined the case of the Docklands Light Railway Scheme after its trustees and sponsor, Serco Limited, failed to reach agreement over the 2009 actuarial valuation.

The report documents how the regulator had to step in after discussions between the two parties broke down and the deadline was missed.

The regulator considered exercising its funding powers and issued a warning notice, but after further negotiations and ultimately court proceedings a settlement was reached. Under the final agreement the sponsors agreed to pay £37m to the DLR scheme.

There’s got to be some give and take on both sides – that becomes an awful lot easier if you’ve got an ongoing good relationship

Lesley Titcomb, The Pensions Regulator

Lesley Titcomb, chief executive at the regulator, said the report had been published with the aim of helping trustees understand the processes undertaken by the regulator to resolve disagreements and issues that can arise during the valuation process.

Problem areas include issues around:

• the submission of valuations on time;

• the assumptions used in valuations;

• recovery plan arrangements to clear deficits;

• employer covenant assessment.

Titcomb said the DLR case was of particular value for trustees because the regulator had been close to using its powers to bring about a resolution.

“Trustees are really interested in understanding how we resolve these situations because it may help them in their [own] circumstances,” said Titcomb.

She said trustees could ease the valuation process and avoid potential difficulties by engaging with sponsors early and maintaining a good ongoing discussion.

“There’s got to be some give and take on both sides – that becomes an awful lot easier if you’ve got an ongoing good relationship,” said Titcomb.

“[If] they’re used to talking to and dealing with each other [it] will make these three-year valuation processes an awful lot easier.”

Seek out decision-makers

Adrian Kennett, director of professional trustee company Dalriada Trustees, said complex employer structures and overseas parent companies had the potential to make signing off on a valuation more complex for trustees.

Kennett said: “If you’re dealing with a massive employer you need to understand who really has the power to decide on behalf of that employer the employer’s stance.

“You need to understand at the outset who the key decision-makers are within the employer… [with sizeable multinationals] that party may not be your day-to-day employer contact for pensions issues.”

On valuations, Kennett said trustees should enable sponsors to have full visibility of a viable project plan to enable parties to complete the process well within the statutory deadline.

“What you don’t want to be doing is getting your valuation result after four-to-five months from the actuary… and at that stage trying to figure out who you should be talking to at the employer,” he said.

He added that a robust project plan should also have some built-in contingency in case deadlines are not met.

Philip Jelley, of counsel at law firm Norton Rose Fulbright, agreed and said it was rare for schemes to miss the deadline but tackling the valuation early would allow time to resolve any issues that do arise during the process.

“The key thing [for trustees] is to start the process as early as they can,” he said.