The Pensions Regulator has published its annual funding statement, providing guidance for those schemes whose actuarial valuation dates fall between 22 September 2017 and 21 September 2018. We set out below the key messages.
Valuations
TPR expects schemes having valuations between September 2017 and September 2018 to see a slight improvement in their funding level compared with three years ago. However, schemes will have been affected differently by market conditions, for instance:
- For a tending-to-strong employer with a long recovery plan, TPR expects trustees to:
- strengthen the technical provision basis,
- increasing deficit contributions and
- reduce the length of the recovery plan.
- For a weaker employer with limited affordability TPR expects:
- the employer to prioritise scheme liabilities over shareholder returns and
- trustees to monitor covenant risk and to secure proportionate reward for the scheme, either from employer growth or from other forms of available support.
Dividends and covenant leakage
- TPR is concerned about the growing disparity between dividend growth and stable deficit reduction payments, especially since it considers that the payment of dividends indicates that there are no affordability concerns.
- Pensions are deferred pay and pension deficits are corporate liabilities which need to be repaid, so TPR expects trustees to negotiate robustly with the employer to secure a fair deal for the pension scheme.
- Trustees should be alert to other forms of covenant leakage when considering affordability and whether the scheme is being treated fairly. Examples are loans to related companies, disposal of assets below fair value and high levels of senior management pay.
Risk Management
- The continuing uncertainty over future economic conditions and the persistent low interest rate environment highlight the importance of effective risk management.
- Trustees should monitor risks and take action when required, irrespective of the scheme’s funding position. Scheme size should not be a barrier to undertaking necessary work to understand the scale and nature of the risks.
- Effective risk management requires documented and workable contingency plans. Where possible, legally enforceable contingency plans represent the best protection for schemes.
Transfer values
- Trustees considering whether to allow for transfer values in their valuation assumptions should consider their scheme’s experience and likely future trends. If by making an allowance it reduces technical provisions, monitor experience and put contingency plan in place to make good any funding strains.
Brexit
- Whilst there remains uncertainty about how Brexit may affect schemes and sponsors, TPR expects open and collaborative discussions between trustees and sponsors to understand the potential impact for the scheme and the sponsor.