Summary
The Pensions Regulator has published its annual funding statement, providing guidance for those schemes whose actuarial valuation dates fall between 22 September 2018 and 21 September 2019, although it should be of interest to other schemes as well.
This year’s statement’s key themes are:
- having a clear strategy to meet long-term goals,
- strategy being appropriate to a scheme’s maturity and
- schemes being treated equitably with shareholders.
The statement includes also a reminder that the Regulator will be consulting later this year on a new code of practice on funding.
Current valuations
TPR expects the funding position of schemes having valuations between September 2018 and September 2019 to be slightly better or slightly worse compared with three years ago, depending on their actual valuation date and other scheme-specific factors. Schemes that have hedged interest rate and inflation risk will be better off than those that remained unhedged.
Ahead of the new funding code of practice, TPR sets out its expectation that trustees will develop a clear long-term plan for delivering benefits to members with minimal dependence on the employer’s covenant. For most schemes this will be a plan to reach self-sufficiency or to be in a position to secure all the benefits with an insurer. TPR expects these long-term plans to cover schemes’ investment strategy as well as a funding plan.
The median recovery plan length is currently 7 years; TPR expects that schemes with a strong employer covenant will have a recovery plan “significantly shorter” than this. It will engage with a number of schemes, ahead of their 2019 valuation, where it considers recovery plans to be too long.
TPR notes that contingent assets may be appropriate where employer cashflow is constrained (but security is available) or where an employer is concerned about the possibility of trapped surplus.
Achieving results
TPR is getting tougher on schemes that fail to complete their valuations on time, although it acknowledges that it would rather that trustees achieved a good deal for the scheme late than agree a poor deal in order to meet the deadline. The key is in ensuring that work on the valuation begins in good time and that there is an action plan agreed by all those involved. Trustees and employers should be prepared to justify their approach with evidence of robust negotiations having taken place.
Risk Management
TPR continues to promote integrated risk management of covenant, funding and investment but now expects trustees to take their scheme’s maturity into account also, noting that, as schemes mature, benefit payments each year are likely to represent a larger percentage of a scheme’s assets.
TPR assesses the overall risk profile of a scheme, taking account of:
- the level of contributions being paid,
- the additional deficit that could arise from the investment strategy, in particular whether it can be supported by the employer covenant,
- the degree of prudence in the technical provisions,
- the length of the recovery plan,
- steps taken by trustees to challenge covenant leakage through, for example, the payment of dividends,
- agreed contingency plans and
- risks which do not appear to be supported by the employer covenant.
TPR may engage with schemes on the basis of any concerns that arise from their risk profile.
Half of the statement is taken up by tables in which TPR sets out its expectations in relation to funding, investment and covenant for schemes of different levels of covenant, funding position and maturity. Common threads are:
- covenant: increase deficit-reduction contributions and/or reduce the length of recovery plans, make contingency plans,
- funding: set a long-term funding target (LTFT) and establish a journey plan for how to achieve it, ensure that technical provisions are consistent with the LTFT,
- investment: set a long-term asset allocation that is consistent with the LTFT and a de-risking plan for moving towards it.
Dividends and covenant leakage
Where dividends (and other payments to shareholders) exceed deficit-reduction contributions (DRCs), TPR expects there to be a strong funding target and a short recovery plan. If an employer is weak and unable to support the scheme, TPR expects no dividends to be paid at all.