What are the key take-aways for trustees and sponsors from TPR’s Annual Funding Statement?

by Rachel Graham   •  

The Pensions Regulator (TPR) has released its latest annual funding statement in which it sets out expectations for pension schemes undertaking valuations; in particular valuations with effective dates in the period 22 September 2021 to 21 September 2022.

Similar to previous years, there is a strong focus on collaborative working between trustees and employers and adopting an integrated approach to risk management. Also featuring again are TPR’s tables, illustrating its expectations for managing the key funding, investment and covenant risks affecting schemes, depending on their covenant strength and maturity.

Current topical issues include considerations for trustees and scheme sponsors on the Russia-Ukraine conflict, the Covid pandemic, and Brexit (still!). The current economic background is tricky and schemes need to deal with the impacts of rising inflation rates, volatile - albeit increasing - interest rates and slower economic growth. All of which are likely to affect how one or more of a scheme’s funding, covenant and investment risks play out.

In terms of scheme funding, trustees and sponsors carrying out actuarial valuations will need to consider whether they should be amending their current approach to setting their most important assumptions – namely, discount rates, inflation rates and mortality. Of course, the extent to which schemes are already hedged will be an important factor. And it is worth saying that, generally, schemes that previously took action to hedge out these risks have performed better than those which did not. There will be a range of valuation assumptions that may be acceptable and trustees should take advice from their advisers when setting valuation assumptions.

TPR points out that inflation assumptions should be carefully considered – in particular, the choice of inflation risk premiums and allowance for the alignment of RPI to CPIH from 2030. There will be a range of RPI and CPI assumptions that may be appropriate. Given the recent volatility and increases in inflation, when setting assumptions for future pension increases (in deferment and in payment), trustees and sponsors will need to carefully consider the type of inflation-linked benefits their scheme offers and the timing of the inflationary increases due.

With regards to mortality, TPR states that where trustees feel that changes to their mortality assumptions are appropriate and justifiable, they expect any reduction in liabilities due to such changes to be no more than 2% (unless accompanied by strong supporting evidence).

Real-time funding information can help avoid missed opportunities

Trustees and sponsors who have easy access to integrated scheme funding and investment strategy information available in real-time are going to be far better placed to react to further market movements, compared to those which are being run from older, disjointed, legacy systems. These schemes with the better technology will be able to benefit both by taking action to protect themselves against funding levels worsening and also finding themselves in a position to take advantage of any upside. The other schemes will simply be trying to work out what has gone on. By the time they do the situation may well have changed and opportunities lost.

We’ve summarised key points from TPR’s annual funding statement here.

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