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Article | Benefits Hot Topics

The Pensions Regulator calls for long-term funding targets and a tough stance on dividends

Pensions Risk Solutions
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March 6, 2019


The Pensions Regulator has published its 2019 annual DB funding statement, which is relevant to trustees and sponsors of all private sector DB pension schemes

On 5 March 2019, The Pensions Regulator (TPR) published its latest annual DB funding statement, which is relevant to trustees and sponsors of all private sector DB pension schemes, but will be of particular interest to those undertaking an actuarial valuation with an effective date between 22 September 2018 and 21 September 2019. TPR also suggests that the statement is of relevance to schemes undergoing significant changes that require a review of their funding and risk strategies.

TPR's analysis suggests that funding levels for individual schemes may be marginally better or worse than at the previous valuation, with schemes that did not hedge their interest rate and inflation risks being likely to have fared worse than other schemes.

Long-term funding targets

With an eye on the Government's policy in its March 2018 white paper to require schemes to have a specific long-term destination, TPR now expects all schemes to consider their longer term strategy for delivering benefits and set a consistent long-term funding target (LTFT). Schemes should be prepared to evidence that shorter-term investment and funding strategies are aligned with their LTFT. An example given is that of reducing a scheme's dependence on the employer when the scheme reaches a particular level of maturity, so that the scheme can be managed thereafter with a high degree of resilience to investment risks.

Dividends

TPR continues to be concerned about inequitable treatment of schemes relative to shareholders and outlines its expectations that:

  • Where dividends and other shareholder distributions exceed deficit recovery contributions (DRCs), there should be a strong funding target and a short recovery plan
  • If the employer covenant is tending to weak or weak it expects DRCs to be larger than shareholder distributions, unless the recovery plan is short and the funding target is strong
  • If the employer covenant is weak and unable to support the scheme, it expects the payment of shareholder distributions to have ceased.

Balancing risks

Integrated risk management (IRM) has been a central part of TPR's guidance over recent years. In this year's statement TPR also indicates that it expects trustees to take into account risks that arise from scheme maturity, because this can put a different complexion on the risks that need to be managed, especially investment volatility.

TPR emphasises that it does not assess the appropriateness of schemes' technical provisions or discount rates by reference to fixed margins over gilt yields, but instead applies an integrated approach to assessing the overall risk profile of each scheme using a wide range of factors. It takes the view that schemes with strong sponsor covenants should generally have recovery plans which are significantly shorter than seven years.

TPR sets out additional guidance on the key risks that trustees and employers should focus on and expected actions, depending on a scheme's individual circumstances: in particular with regard to their sponsor's covenant strength, the scheme's funding and investment characteristics and its maturity.

Well-funded schemes based on strong technical provisions, with short recovery plans and supported by strong sponsor covenants are expected to have a clear IRM strategy, with realistic contingency planning for downside risks and to have agreed an ultimate goal for the scheme. Such schemes should aim to progress from their current technical provisions to the LTFT within a realistic timeframe.

TPR repeats the message from previous statements that it expects valuations to be completed within the 15 month statutory deadline, but emphasises that trustees should not agree to an inappropriate funding plan simply to meet the deadline.

The statement ends by noting that TPR can use its powers to set technical provisions and contributions where the deadline for completing the valuation is not met, or where it appears that the assumptions or recovery plan do not meet statutory requirements. It also notes that TPR can intervene in other ways if a scheme is not being treated appropriately, and that this can range from one-to-one supervision, through to use of improvement notices, issuance of penalties or an anti-avoidance investigation.

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