The first quarter of 2018 has flown by and has proved to be an eventful three months. We have had no problem finding topics worthy of inclusion in this Quarterly Update – it’s been more of a problem deciding what NOT to include. We have been ruthless however and pulled together the topics that we believe you need to know about from January to March 2018. Enjoy!
The topics of note this quarter include:
- GDPR Compliance
- Government White Paper on DB Schemes
- The Pensions Regulator and recent Corporate Failures
- DC Consolidation
- Reviewing your Currency Hedge
- EIOPA Market Development Report
- New CMI mortality improvements
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This guide is intended to be a useful reference for companies preparing their 31 March 2018 pensions accounting disclosures, whether under FRS 102 or IAS 19.
In this guide, we will review the changes in the investment markets over the last 12 months and consider the impact these will have had on a typical pension scheme. We will also review recent developments in the area of pensions accounting, highlighting issues that you should be aware of.
To discuss these topics further, please contact Spence through your usual contact or connect with our Corporate Advisory practice associate, Angela Burns, at email@example.com or by telephone on 0141 331 9984.
The Pensions Regulator (TPR) has now issued their 2018 annual funding statement (“the Statement”) for defined benefit (“DB”) pension schemes undertaking valuations with effective dates in the period 22 September 2017 to 21 September 2018.
As per the 2017 Statement, TPR outline the ‘appropriate action’ they expect trustees to take with regards to funding. The recommended actions depend on the strength of the employer covenant and the funding characteristics of the scheme in question. This can be a helpful tool for Trustees undertaking valuations, giving a list of issues to consider and potential action to take.
The Statement puts a particular focus on the need for Trustees to negotiate robustly with employers to ensure pension schemes are being treated fairly. TPR are “concerned about the growing disparity between dividend growth and stable deficit reduction payments”. TPR notes that Trustees should monitor ‘covenant leakage’ (i.e. value leaving the business) and decide if the overall covenant strength is affected. If it is felt there is a change in the covenant, funding and investment decisions should be revisited to ensure an appropriate level of risk in the funding plan.
The Statement goes on to advise Trustees to monitor transfer activity and to consider the potential impact on scheme funding. If Trustees decide to make an allowance for transfer activity in the funding plan then this should be based on evidence, monitored over time and a contingency plan put in place should experience not be as expected.
The Statement also touches on the uncertainty of Brexit and encourages a collaborative approach to be taken between trustees and employers in order to understand the potential impact of Brexit on the scheme and employer.
The Statement makes a number of references, explicitly and inexplicitly, to TPRs Integrated Risk Management guidance and stresses the importance of having sufficient contingency plans in place should things not turn out as expected. TPR are clear that they will taker a tougher approach to trustees who fail to act in the best interest of members, and as part of their risk assessment approach, TPR will question schemes’ funding and investment strategies if they do not believe they are appropriate.
In our view, it is becoming more and more important for Trustees to have access to information quickly and efficiently to ensure that monitoring can be carried out and contingency plans implemented where required. TPR are also taking a tougher view on late valuations again supporting the need for efficient valuation processes. We welcome this approach and hope that Trustees and employers are challenging advisors to meet these requirements.
It did not take Holmes-ian powers of deduction to pick up the influence of recent corporate failures in the Pensions Regulator’s annual funding statement that was issued on 5 April.
The annual “state of the nation” address on funding of Defined Benefit Pension Schemes made clear the disquiet from the Regulator that dividend payments were increasing but deficit contributions were not. The statement stresses the need for trustees to ensure “fairness” for their schemes relative to corporate shareholders/stakeholders. Where employers are strong, trustees should be “looking to fix the roof while the sun is shining” if you like. The Regulator has (pleasingly) avoided the temptation to try and fix parameters against which trustees should judge fairness. The current regime is founded on flexibility and I do hope this continues. Recent implications (in the Government’s White Paper) that greater direction/restriction is coming has me fearing a return to the days of a set Minimum Funding Requirement. The last attempt at MFR didn’t work and was quickly swept aside. I suspect that any attempt to turn back the clock on this would meet a similar fate.
There was also a reminder that dividends are not the only target, with the introduction of what might become a buzz-phrase – “covenant leakage”. This is really a catch-all phrase to describe any route by which the security of the scheme’s position is damaged by corporate activity. For me, this points strongly towards trustees drawing up and monitoring some key indicators to monitor company performance and company strength and take action to prevent deterioration or react swiftly if there is a change. And remember, it can be just as important for trustees to react when their sponsor’s position improves, allowing the scheme to share in this success and put their scheme on to a stronger footing.
The statement contained further “hints” that some trustee boards are not sufficiently well-equipped to tackle complex funding and investment issues. Trustees are expected to seek appropriate advice, especially where the board does not have the sufficient expertise or where potential conflicts exist.
Many other themes in the 2018 statement were follow-ons from 2017, such as the prominence given to the importance of contingency planning.
One part I struggle with is the continued highlighting of “Brexit uncertainty”. Yes, we know there is uncertainty. However, if the Government doesn’t know what is going to happen, the markets don’t know what is going to happen, advisors don’t know what is going to happen, then what chance do trustees have? I fear that trustee resources could be diverted in speculative discussions about future scenarios rather than focussing on more measurable, controllable risks.