Late last week the Pensions Regulator released its 2018 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 2017 to 21 September 2018.
Some of the key points are:
1. There have been a few high-profile corporate failures in the last few years, with Carillion the most recent. The Regulator emphasises the need for pension schemes to be treated fairly alongside shareholders and encourages trustees to compare the relative amounts of dividends and contributions when assessing affordability. Trustees should also be alert to other movements of assets out of the sponsoring employer, for example intra-company loans or asset transfers.
2. The Regulator continues its proactive engagement in the valuations of some schemes. Historically this has focussed on the largest schemes, but it has now been extended to some smaller schemes as well. Affected schemes will have already received a letter from the Regulator to start the process.
3. Trustees should consider the potential effects of Brexit on their sponsoring employer. If employers want to retain cash to protect themselves then agreeing a longer recovery plan might be appropriate as long as shareholders are sharing the burden. Trustees should make sure they have contingency plans in place and might want to seek additional security from the sponsor.
4. Many schemes with a valuation this year will see a slightly improved funding position compared to three years ago. However, there will be significant variation between schemes. Trustees of schemes with a strong sponsor should consider strengthening their technical provisions or shortening their recovery plan if possible. Trustees of schemes with weaker sponsors should look to reduce risk and ensure that the sponsor prioritises the pension scheme over shareholder returns.
5. The Regulator continues to focus on integrated risk management. 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. This should include the deficit that could arise through investment underperformance. The Regulator will consider these factors alongside the contributions agreed when it reviews a valuation submission.
6. Many schemes are paying out more transfer values than in recent years. Trustees should keep records of transfer activity, including the advisers and the schemes to which transfers are made. If trustees have concerns over the quality of the advice being given to members, they should contact the Regulator or the FCA. Trustees can allow for assumed transfers out of the scheme in their funding assumptions if they wish but must have contingency plans in place in case this does not materialise.
The 2018 Annual funding statement can be found here.