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tPR’s Annual Funding Statement 2017

Earlier this week the Pensions Regulator released its 2017 Annual funding statement for defined benefit pension schemes. The statement is primarily aimed at trustees and employers undertaking valuations with effective dates in the period 22 September 2016 to 21 September 2017.

Some of the key points are:

1. Following a volatile year in 2016, the Regulator urges schemes to ensure that contingency plans are in place in case current low yields persist. The previous year in particular has highlighted the benefits of Integrated Risk Management. Schemes who find themselves in worse positions than anticipated may need to implement their contingency plans to mitigate the risk of any further damage to their funding level.

2. Trustees of schemes with a strong sponsor should not extend their existing recovery plan end date unless there is a good reason to do so. Trustees of schemes with weaker sponsors should look to reduce risk and obtain other forms of security, e.g. from the sponsor’s wider group. Trustees of stressed schemes (where there is a risk of employer insolvency) should look to achieve the best possible outcome for members and not call on the PPF unless sponsor insolvency appears inevitable.

3. Trustees should consider with their advisers whether recent market volatility and current low yields might change their longer-term view of risk and returns. Trustees must consider the appropriateness of the investment strategy and the strength of the employer covenant when assessing the risk capacity of the scheme and the risk appetite of the employer.

4. The Regulator recognises that some trustees feel the traditional ‘gilts plus’ discount rate model is no longer appropriate. Alternative approaches are allowed under legislation, but trustees must have a sound rationale for any change and must document this clearly.

5. The Regulator notes the importance of fair treatment between pension schemes and shareholders. In particular, employer dividend payments should only exceed the deficit contributions to the scheme if the recovery plan is short and supported by an appropriate investment strategy.

The 2017 Annual funding statement can be found here.

Stuart Price

stuart.price@quantumadvisory.co.uk