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Funding

Chapter five of 2019 Emerging Trends in DB Survey

Pension Board and Trustee Consulting|Pensions Corporate Consulting|Pensions Risk Solutions|Pensions Technology|Retirement
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November 2019

Following the White Paper and the impact this had on TPR, this chapter explores scheme decision-makers' views on the matter and it's effect on their scheme.

Following the collapse of the construction and outsourcing firm Carillion, resulting in the biggest ever claim on the Pension Protection Fund, a joint inquiry by two House of Commons select committees concluded that trustees were “outgunned in negotiations with directors intent on paying as little as possible into the pension schemes” and criticised The Pensions Regulator (TPR) for its “feeble response”, noting that the Regulator had never used its powers to impose funding targets or deficit reduction plans.

In March 2018, the Department for Work and Pensions (DWP) issued a White Paper entitled ‘Protecting Defined Benefit Pension Schemes’. This argued that a lack of definition around legislative requirements to choose assumptions “prudently” and to ensure that recovery plans are “appropriate” made it difficult for TPR to prove that the funding rules were not being followed. The Government said it would “strengthen the Regulator’s ability to enforce defined benefit scheme funding standards, through a revised Code [of Practice], focussing on: how prudence is demonstrated when assessing scheme liabilities; what factors are appropriate when considering recovery plans; and ensuring a long-term view is considered when setting the statutory funding objective”. Around half of respondents said that their scheme would benefit from TPR defining what is “prudent” and “appropriate” (with only around a quarter opposing this idea).

After the survey responses were submitted, the Government published the Pension Schemes Bill and explained that it would be taking a slightly different approach. Instead of TPR using a more enforceable Code of Practice to set out what is meant by assumptions being “chosen prudently” and by recovery plans being “appropriate having regard to the nature and circumstances of the scheme”, technical provisions will have to be “consistent” with new long-term targets (which might be set in a more prescriptive manner) and regulations can prescribe what is “appropriate”.

It will take time for this legislation to be enacted. In the meantime, and as part of an approach that it describes as being “clearer, quicker, tougher”, TPR sought to clarify its expectations on funding. Its 2019 Annual Funding Statement said: “Where dividends and other shareholder distributions exceed Deficit Reduction Contributions (DRCs), we expect a strong funding target and recovery plans to be relatively short”, though adding that, “in practice, TPR’s response will be proportionate having taken into account the relative size of the sponsor and the scheme deficit”. In this area, we find that trustees are much more likely to be aligned with the views of TPR as half agree that dividends should only exceed deficit contributions if recovery plans are short (while only 13% disagree); corporates are more likely to disagree (32%) than agree (22%). Trustees did, however, tend to agree (73%) that their schemes had been treated fairly relative to shareholders in recent years (Figure 6).

Figure 6 Shows that the majority of trustees and corporates said their pension scheme has been treated fairly, relative to shareholders, in recent years, when asked to what extent do they expect their scheme to rely on certain options to achieve its long-term goals.  
Figure 6: It has been suggested that companies should increase deficit payments at the expense of dividends. How strongly do you disagree or agree with the following statements?

Note: Percentages may not sum to 100% due to rounding

Still, the majority of both Corporates and Trustees agree that deficits should be paid off as soon as possible, based on what the employer can afford, a principle that TPR had signalled would feature in the Code.

Against this backdrop, with a marked change in tone and focus from TPR, around half of respondents expect trustees to have significantly more negotiating power in the future (Figure 7). As a result, and also possibly due to changing market conditions, over two thirds expect employers to pay significantly more into underfunded schemes in the future. Nevertheless, only a minority (a third of trustee respondents and a fifth of corporate respondents) think the Select Committee’s activities have fundamentally changed directors’ perceptions of what they need to pay into their DB schemes.

Figure 7 shows that 66 -77 percent of trustees and corporates agreed that we can expect employers to pay significantly more into underfunded schemes.  
Figure 7: To what extent do you agree or disagree with the following statements?

Consistent with negotiating power shifting to trustees, at the next actuarial valuation four in 10 respondents expect their scheme’s technical provisions to be stronger (Figure 8) and very few expect them to be weaker. And around a third expect recovery plan end dates to be shorter.

Nevertheless, only 13% of those with a trustee role and 24% of those with a corporate role expect annual deficit reduction contributions to increase and higher numbers expect them to fall (22% and 29% respectively). This may reflect how, for their schemes, funding has improved. Yet, 2019 has seen markets worsen and trying to strengthen technical provisions and bring forward recovery plan end dates without increasing DRCs may often be a forlorn hope.

Figure 8 shows that both trustees and corporates expect there to be no change in the Technical provisions at the next actuarial valuation. 
Figure 8: How would you expect Technical provisions to change at the next actuarial valuation?

Note: Percentages may not sum to 100% due to rounding

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2019 Emerging Trends in DB Survey PDF 5.4 MB
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