Deficit recovery plans are only reducing marginally, but some schemes with a weak sponsor covenant have very long time horizons to reach full funding, raising questions over whether another BHS is possible

 

Deficit recovery plans increased by two years for defined benefit schemes with valuation dates in March 2018, the Pensions Regulator’s latest funding analysis shows. 

 

Scheme funding analysis 2020 looks at the schemes with the latest triennial valuations submitted to the regulator. ‘Tranche 13’ comprises more than 1,700 valuations, many of them with an effective date of 31 March 2018. 

 

The analysis shows that compared with their previous valuations, tranche 13 end dates have increased by a median two years.  

 

Just over two-thirds of schemes (68%) - including the 37% which are in surplus - have brought forward their recovery plan end dates or have left them broadly unchanged. But even though many have reduced their recovery plans, the regulator points out that “a reduction in recovery plan length of less than three years between tranches still represents an extension to the date at which the scheme is anticipated to be fully funded”. 

 

About one in six schemes (17%) have extended their recovery plan end-date by up to three years, meaning it remains the same in terms of years to recovery, while 15% extended their recovery plan end-date by more than three years. 

 

Distribution of changes to recovery plan end dates, by Tranche 10 and Tranche 13 recovery plan length groups (schemes in both Tranches 10 and 13) 

 

 

 

The average recovery plan length is now 6.1 years, slightly lower than in previous years – for tranche 10 it was 7.3 years – with the largest schemes stretching the timeframe the most. 

 

TPR notes that “in respect of their first valuations under scheme specific funding, schemes in Tranche 1 had a median recovery plan end date falling in 2016. Under the fifth cycle of funding, broadly the same set of schemes have a median recovery plan end date falling in 2024.” Schemes have in effect added eight years to their recovery plans. 

 

Those with weak sponsor covenants tend to have the longest recovery plans, raising questions over their sustainability as their sponsor might not be around at the projected end date of the recovery plan. Three-quarters of schemes with a weak covenant have recovery plans of up to 12.2 years, but some stretch beyond 20 years. 

 

Given the impact of Covid-19 on sponsors, the number of schemes falling into the Pension Protection Fund could thus rise sharply in coming months. Where employers had been struggling for some time and recovery plans were long to artificially keep it alive, questions might be asked that are reminiscent of previous crises. 

 

The regulator faces the task of preventing what is referred to as ‘PPF drift’ - the fact that the longer a company trades, the higher the liabilities the PPF has to cover, due to inflation increases and because the lifeboat fund covers all of a pensioner’s benefits while it applies a haircut for those below retirement age. 

 

Extending a scheme’s recovery plan is usually done to minimise sponsor contributions, but if applied to schemes of companies that would likely become insolvent anyway this is not in the PPF’s or its levy payers’ interest – or the regulator’s, which is tasked with protecting the PPF. 

 

BHS famously had a recovery plan of 23 years for its pension fund when it went into administration in April 2016. 

 

When the report into its demise was published following an inquiry, former Work and Pensions Committee chair Frank Field said: “We hope and expect that we will never again see a company like BHS be able to come up with a 23-year recovery plan for its pension fund, and certainly not that it would take the Regulator two years to really begin to do anything about it.”