The Pensions Regulator has published its 2016 annual statement on defined benefit funding. It is aimed at trustees and employers of schemes undertaking valuations with effective dates from 22 September 2015 to 21 September 2016.
For schemes with a valuation this year the Regulator notes that:
- Many asset classes have performed well over the last three years but gilt yields have fallen significantly. Trustees are therefore likely to see a larger funding deficit in this valuation than expected at the last valuation.
- According to the Regulator’s analysis, many sponsors may be able to afford to ‘increase contributions so that their existing recovery plan end date can be maintained’. If this is not possible then any extension to the recovery plan should include consideration of the related risks.
- If affordability is constrained, trustees should consider the level of risk within the scheme and the possibility of alternative security from the sponsor.
- If trustees have previously made allowance for gilt yields reverting to higher levels, they should consider the effect of this not being borne out over the last few years and implement any contingency plans.
- The latest mortality models published (CMI 2015) show lower increases in life expectancy than in previous years. The Regulator is comfortable with trustees using these tables but does not believe there is evidence yet that the lower increases will continue in future years.
The statement also reinforces the key principles in the Code of Practice on funding defined benefits and the recent guidance on Integrated Risk Management. Key messages are as follows:
- Trustees should understand:
- the risks inherent in the running and financing of the scheme,
- the sensitivity of the scheme’s funding position to these risks,
- the likelihood of adverse impact of these risks, and then
- set appropriate funding and investment strategies accordingly.
- Trustees should be comfortable with the level of risk associated with the expected investment return, and consider what actions could be taken if the adverse risk should materialise. Contingency plans should be put in place and the risks monitored closely to enable prompt action if necessary.
No immediate action is required, but trustees are expected to take a broader view of risks in the scheme as they work through the valuation process, considering in particular how those risks interact.
Quantum Advisory
May 2016