On a Journey: Regulator publishes its annual funding statement

The Pensions Regulator (TPR) has published its Annual Funding Statement (AFS) for 2019, setting out its expectations of the trustees of defined benefit (DB) pension schemes and their sponsoring employers on scheme valuation matters.

The key messages from the AFS are:

Long-term funding targets – Trustees and employers should agree a long-term funding target (LTFT), and have a ‘journey plan’ of how to achieve it.  Investment and funding strategies should be consistent with that target, and trustees and employers should be in a position to evidence the alignment between those strategies and their LTFT.  The Government intends to introduce a requirement for schemes to have an LTFT: trustees should take steps to factor the concept of an LTFT into their thinking (if they do not already do so), in order to be better prepared for when the requirement comes into force.

Maturity – With most schemes being closed to new entrants, maturity issues are becoming more prevalent in funding and investment considerations.  As schemes mature, trustees increasingly need to take into account the interaction between

  • the levels of both assets and underfunding, and of benefits being paid out.
  • a scheme's ability to reduce its funding deficit in a "reasonable timeframe", through investment returns and contributions. 

TPR’s expectations of trustees and employers – The AFS sets out TPR’s expectations for various sub-categories of DB scheme, divided by characteristics such as scheme maturity, funding position and employer covenant strength.  Key risks are set out for each sub-category, and TPR’s expectations are outlined in terms of covenant, funding and - newly for these tables - investment matters.  In terms of investment matters and most of those sub-categories, TPR expects trustees and employers to:

  • set a long-term asset allocation consistent with the scheme’s LTFT.
  • establish a 'journey plan' to move towards that allocation. 
  • quantify the impact on funding of adverse investment performance. 
  • test and evidence the covenant's ability to support downside investment risk by means of additional cash and non-cash funding, without extending the length of the recovery plan. 

TPR’s new approach – For some time, TPR has been emphasising its new approach to regulating DB schemes.  The AFS notes that TPR will be proactively contacting schemes in relation to which it has concerns regarding specific aspects of their funding or investment approach, and, in particular over the next few months, those schemes in which concerns exist regarding equitable treatment (e.g. regarding the relative levels of dividends and deficit reduction contributions paid by an employer).

TPR will also be contacting a range of schemes in relation to which the recovery plans that are in place are, in its view, unacceptably long.  TPR will set out its concerns and ask questions of the parties with a view to addressing those concerns.  TPR intends to include schemes with a range of employer covenant strengths in the exercise.

Comment

Trustees and employers should consider the AFS and understand into which sub-category their scheme falls: TPR’s views on the key risks of each, and how it expects trustees and employers to approach covenant, funding and investment matters are a useful starting point for discussions between the parties and their advisers.

The AFS is available to view here.

Latest updates from @MacRoberts

  • To celebrate the Olympic Games in Tokyo, we're delighted to launch our latest sporting challenge in support of our… https://t.co/Y8IEq3eT53 23/07/2021
  • MacRoberts is recruiting! We are currently looking for a Real Estate Planning Solicitor to join the MacRoberts tea… https://t.co/ioGQaF2hQc 23/07/2021
  • The countdown is on! With just 100 days to go, we’re looking forward to #COP26 in Glasgow! ♻️ As a firm accredite… https://t.co/Ooldhmo8tW 22/07/2021
  • Has lockdown led you to consider a move to the countryside? From discussing a possible purchase to obtaining the… https://t.co/patbF42pjk 22/07/2021
  • Have you seen our latest vacancies? 💼 We currently have opportunities in various departments across the firm. Fin… https://t.co/NpiWs2sphg 21/07/2021
  • Acas has published new guidance for employers with helpful information on #flexibleworking & #hybridworking. With t… https://t.co/SoX87hFkko 20/07/2021
  • Busting the myth that a career in law is only for the privileged few: @marikaflawyer is speaking at this morning’s… https://t.co/awfcub4cw0 19/07/2021
  • MacRoberts is recruiting! We are currently looking for a Support Services Assistant to join our team in Edinburgh.… https://t.co/DJ27fRmmdb 16/07/2021
  • MacRoberts is pleased to have been part of the team advising @HV_Systems in its £5m capital boost from Beehive Equi… https://t.co/BxcwjCgIVk 15/07/2021
  • MacRoberts is recruiting! We are currently looking for a NQ Solicitor to join our Conveyancing & Private Client te… https://t.co/zubGY4zo0D 14/07/2021
  • For the last of our IGTV mini-series, we hear from Katie MacLeod. She will be giving an insight into what it’s like… https://t.co/0v2nNQ9zzZ 14/07/2021
  • RT @marikaflawyer: Exciting opportunity for Associate in our award winning Family Law team #familylaw #LegalCareer https://t.co/z3WEtfFJUo 14/07/2021
  • MacRoberts is recruiting! We are currently looking for an Associate to join our Family Law team in Edinburgh or Gl… https://t.co/CaitiMeVBs 14/07/2021
  • Last week, the UK Government took the decision to relax the rules on the length of time lorry drivers can work as a… https://t.co/o559McerYg 13/07/2021
  • Did you know that we are on Instagram?😜 Follow our page for all the latest legal updates, exclusive IGTV’s and mor… https://t.co/Xx2xOMGBZg 09/07/2021