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The 2019 annual funding statement: Five expectations, two to expect and three to be expected...

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This article takes a look at what The Pensions Regulator expects of trustees and how the funding statement is relevant to all DB pension scheme employers.

The Pensions Regulator (“TPR”) published its latest annual funding statement on 5 March 2019 and, while primarily aimed at those carrying out valuations with effective dates in the period 22 September 2018 to 21 September 2019, it is relevant to all DB pension scheme trustees and employers.

The statement sets out the key expectations TPR has for trustees and employers, as well as what trustees and employers can expect from TPR, with a clear emphasis on TPR becoming a more proactive and tougher regulator, when required. 

What TPR expects of trustees

(a) Long-term funding target (“LTFT”)
TPR is expecting all trustees and employers to agree a LTFT, which should be consistent with how they expect to “deliver the scheme’s ultimate objective”, with “journey plans” looking beyond being fully funded on the statutory technical provisions basis “to becoming fully funded up to the LTFT”. Trustees and employers should also be prepared to evidence how shorter-term investment and funding strategies are aligned with the LTFT.

In its March 2018 DB White Paper, the Government announced its intention to introduce a requirement for schemes to have a “long-term financial destination”, so the LTFT is an early adoption of this by TPR.

(b) Balancing risks
Consistent with its previous statements and guidance, TPR emphasises the need for an integrated risk management approach, with trustees looking at covenant, investment risk and funding in the round.
As in previous years, TPR segments schemes based on their risk profile (dividing schemes into 10 different categories), but this year maturity is a significant factor. Since the majority of schemes are now closed to new members, TPR expects scheme maturity to assume greater prominence when setting funding and investment strategies in the future.

The statement contains a series of tables, setting out the key risks and actions trustees and employers should focus on, depending upon the category into which their scheme falls. Clearly, expert advice will be essential for trustees and employers to understand the implications for their scheme.

What can trustees expect from TPR

(a) Equitable treatment
TPR remains concerned about the disparity between dividend growth and stable deficit reduction contributions (“DRCs”).
TPR expects pension schemes to be treated “equitably” with other stakeholders, with the following key principles underpinning its expectations: 
·       where dividends and other shareholder distributions exceed DRCs, TPR expects a strong funding target and short recovery plans; 

·       if the employer covenant is tending to weak or weak, DRCs should be larger than shareholder distributions unless the recovery plan is short and the funding target strong; and

·       if the employer is weak, TPR expects shareholder distributions to have ceased.

(b) Long recovery plans  
Where a scheme’s existing recovery plans are “unacceptably long”, TPR may engage with it and set out its expectations for the forthcoming valuation. TPR plans to engage with a wide variety of schemes but will consider both the maturity and the covenant of the employer in forming a view on what it considers acceptable.

(c) Late valuations
As noted in previous statements, TPR expects trustees to plan ahead so that they have sufficient time for advice, analysis and negotiation. If the statutory deadline is missed, trustees should report this “in good time” and seek to agree an appropriate valuation and recovery plan as soon as possible. 

However, TPR is clear that trustees should not agree an inappropriate valuation and recovery plan merely because deadlines are imminent or have elapsed. TPR says it will support trustees if they cannot agree a valuation for valid reasons.

Liam Goulding, Associate at Sackers.