The Pension Regulator’s 2018 defined benefit funding statement

Rachel Graham

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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.