Earlier this month, the Pensions Regulator published a report about its funding investigations into the Docklands Light Railway (DLR) pension scheme. The report is the first of this type by the Regulator into a scheme funding case. It gives an interesting insight into why the Regulator has a “low tolerance” for late actuarial valuations and what action the Regulator will take to protect member savings where a defined benefit scheme has missed the statutory deadline for agreeing its valuation.
DLR pension scheme
The trustees of the scheme and the statutory employer which operated the DLR franchise (Serco Limited) were unable to reach agreement on the scheme’s 2009 actuarial valuation by the statutory deadline.
TPR facilitated some initial discussions between the trustees and Serco but these were unsuccessful. So in 2012, the Regulator issued a Warning Notice and planned to request skilled persons' reports on the scheme funding position and the strength of Serco’s covenant to inform how it should use its specific powers under the scheme funding legislation.
However, the Regulator suspended its proceedings due to progress in negotiations between the parties and because the trustees then made a demand for contributions under the scheme rules and went to court to recover payment.
In late 2014 the matter was settled out of court with substantial deficit contributions agreed and underwritten by a parental guarantee. The trustees were then able to submit compliant 2009 and 2012 valuations. Related to this, the Regulator advised the trustees that it was unlikely to proceed with the regulatory action proposed back in 2012.
Comment
This case shows that the Regulator takes a poor view of late valuations. In the report, the Regulator comments that it is important for schemes to have appropriate funding plans in place which reflect an understanding of the schemes’ funding objectives and risks. However, whilst a Warning Notice was issued in this case, it was two years after the statutory deadline for agreeing the valuation had passed. In total, more than four years passed from the deadline to agree the 2009 valuation to the settlement.
The Regulator’s emphasis appears to be more on encouraging cooperation between the trustees and employers and making use of any powers under the scheme rules, before any formal intervention or enforcement action is contemplated.
Regulator’s policy
The approach adopted in the DLR case is reflective of the stance taken in the Regulator’s defined benefit funding regulatory and enforcement policy, which states that:
- If the Regulator receives advance notification that the trustees are likely to fail to complete their valuation within the statutory fifteen-month timeframe, it will generally not engage at that point if work is underway.
- Where schemes and employers have failed to agree to all of the funding requirements within the statutory deadline, this must be reported to the Regulator.
- The Regulator has little tolerance for outstanding actuarial valuations.
- The Regulator will seek to understand the reasons for the delay and the likely date of completion to assess the risk of prolonged non-compliance and to determine the most appropriate course of action. It will also consider any other relevant factors e.g. concerns about governance or evidence of avoidance.
- The Regulator's objective is to facilitate discussions between parties and encourage the trustees and employer to engage and agree an achievable timetable within which they can agree an appropriate outcome.
- Where the delay is likely to be short, the deadline has only just passed or the Regulator is confident that good progress is being made, the Regulator is unlikely to take enforcement action.