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GAD Empowers Ofgem: Power Sector Insights

  GAD's Pivotal Role in Power Sector Pension Review

In a significant move, the Government Actuary's Department (GAD) has provided crucial support to the Office of Gas and Electricity Markets (Ofgem). The collaboration involved a meticulous reasonableness review of pension schemes associated with various power companies operating in the UK.   GAD's High-Level Assessment GAD, through its expertise, conducted a comprehensive high-level review of the defined-benefit pension costs incurred by network operators (NWOs). The findings of this review play a vital role in assisting Ofgem in evaluating price control allowances, particularly concerning the deficits in established pension schemes.   Addressing Consumer Interests: NWO Questionnaires GAD actively engaged with responses from NWOs, as provided in questionnaires by Ofgem. These responses shed light on how pension schemes considered the interests of consumers. This consumer-centric approach aligns with Ofgem's commitment to ensuring fairness and transparency in the regulated power sector.   Regular Ofgem Scrutiny on Pension Allowances NWOs extend occupational pension schemes to their employees, contributing to their retirement income. Ofgem, in its regulatory capacity, consistently reviews the pension allowances that NWOs can recover from consumers through regulated revenue charges. GAD's involvement in this sphere is not new; it previously supported Ofgem in a similar review in 2020. In the latest 2023 review, GAD examined changes in benefit design, investment strategy, and actuarial valuations since the last assessment.   Insights and Key Findings GAD's thorough review revealed a series of noteworthy developments within the power sector's pension landscape: - Improved Funding Positions: Five schemes now boast a surplus, indicating a positive trend in funding positions. - De-Risking Strategies: There is an observed increase in de-risking strategies within the investment approaches. - Inflation Considerations: High inflation rates prompted a closer look at how pension schemes handle inflation-linked increases, with provisions to cap such increases if inflation exceeds 5%.   Consumer-Centric Actions by Power Companies All companies involved demonstrated their commitment to consumer interests by undertaking various actions, including: - Commissioning analyses focused on consumer interests. - Negotiating with trustees for valuation concessions. - Engaging with trustees on investment strategies. - Managing liabilities to prevent consumers from facing undue exposure to higher costs.   Ofgem's Decision Letter and Regulatory Policy In response to GAD's report, Ofgem issued a decision letter, reflecting the regulatory policies shaped by the insights gained from the pension scheme review. This underscores Ofgem's dedication to transparency and responsiveness in the power sector.   GAD's Insights: A Changing Landscape Scott Madden, a GAD actuary and one of the report's authors highlighted the evolving defined benefit landscape. He noted the recent environment characterized by higher inflation and interest rates, coupled with the development of longer-term objectives reflected in the pension schemes of network operators. Madden stated, "These stakeholders have a particular challenge in ensuring that the consumer interest is appropriately taken into account, and we were happy to support Ofgem in forming its view."   Contributions and Actuarial Valuations Contributions required to sustain defined benefit pension schemes are periodically assessed through actuarial valuations. GAD's scrutiny did not identify major concerns in these areas during the latest review, reinforcing confidence in the robustness of the pension systems within the power sector. As the power sector continues to evolve, GAD's invaluable support ensures that consumer interests remain at the forefront of decision-making, fostering transparency, and accountability in the regulated industry.   Sources: THX News & Government Actuary's Department. Read the full article