Joe Dabrowski, Head of DB, LGPS and Standards, PLSA said: “The Pensions Regulator’s Annual Funding Statement provides welcome news about the resilience of pension schemes in the face of the crisis, and fresh flexibility for schemes preparing and finalising valuations.
“It contains important guidance for schemes and employers about its expectations for managing covenant risk or value leakage, delays or changes to deficit contributions, and on tough terms for the return of dividends to shareholders.
“The PLSA supports the clear expectation that, whilst pragmatism is needed to navigate through this crisis, including a need to take account of the pressures on employers, savers’ interests should not be sacrificed.”
Graham McLean, head of scheme funding at Willis Towers Watson, said: “For many schemes embarking on fresh valuations, the deficit recovery plans negotiated three years ago will have been blown a long way off course. In the current environment, not many trustees will feel able to push for more cash straight away, so the date by which the scheme is due to be fully funded will sometimes be years later. Perhaps in the hope of pushing recovery plan lengths back down, the Regulator is telling trustees that standard deficit repair contributions should be supplemented with ‘appropriate incremental increases in contributions, which track corporate health recovery’. One of the balancing acts at this round of valuations will be ensuring that the scheme gets a share of any economic upturn without demanding too much and choking off the employer’s recovery.
“Some of the clear statements about dividends from previous annual statements have not been reiterated – for example, that shareholder distributions should only exceed deficit payments if funding targets are strong and recovery plans short. That’s surprising, as the Regulator has routinely been writing to schemes where it feels that dividends are too high. Perhaps it feels that this will be less of a problem now that some employers are suspending or reducing dividends to preserve cash, and that the priority now is to ensure that these employers pay what’s due to the pension scheme before switching dividends back on.
“Instead, the Regulator goes into more detail about the other forms of covenant leakage that it has always told trustees to be alert to, emphasising that what the employer can afford to pay into the pension scheme should be assessed before various payments to other group companies have been made.”
Laura McLaren, Partner, Hymans Robertson, says: “It’s no surprise that COVID-19 is a major theme for this year’s annual funding statement. However, whilst trustees and employers will need to work together to manage the immediate impact, the Pensions Regulator (TPR) is clear that the focus should remain on long-term planning and robust risk management. TPR has been trailing these messages for some time and they’re very consistent with the direction of travel for the new DB funding code.
“March and April 2020 valuations will be challenging. However, I’d encourage trustees to use the time and flexibility in the funding regime to navigate the prevailing market conditions and uncertainty.
“The timing and shape of any COVID-19 rebound will be highly dependent on both containment of the virus and the effectiveness of policy responses. We therefore support the emphasis on testing different potential future scenarios as a key tool to inform decisions, assess risks and implement meaningful contingency plans. Conversely, if schemes are looking for quick fixes (for example by changing valuation dates) or trying to cherry pick post-valuation experience they should expect scrutiny.
“By once again segmenting businesses and schemes into categories, TPR is able to be more directive about what it expects. Schemes will have fared differently, depending on how well funded they were at the start of the crisis, their investment strategy and also their level of hedging. With some companies and industries being hit harder than others, sponsor covenant and affordability will be key. TPR has been consistent in advocating fairer treatment for pension schemes relative to shareholders for some time. However, with many trustees being asked to support the sponsor over a difficult, but hopefully temporary, period, it is particularly key that equitable treatment is maintained throughout any recovery. As a result, we should expect to see more triggers and ‘upside sharing’ mechanisms – to ratchet up cash when trading/conditions return to normal – being built into funding and risk management plans. Security over assets, guarantees and underwriting investment performance are other levers trustees and sponsors might look at to deliver better member security.”
Alison Stewart, a professional trustee at Dalriada Trustees, said: “While not being a panacea, the regulator’s guidance to pension schemes is a good checklist of the issues that are arising now and what the expectation is in terms of a good response to the crisis and funding levels. It builds on some of the guidance the regulator has already published in response to Covid-19, and is emphasising the need to work collaboratively. Specifically, looking at the response to the strength of employers in the crisis, the regulator does not want employers to turn off the pension scheme tap while keeping it on for shareholders.
“The increasing length of the guidance set out by the regulator is not just a symptom of the current environment, it illustrates the growing complexity in which trustees operate. With the eventual introduction of the DB funding code this is only going to become more complex for trustees.”
Pensions Management Institute (PMI) President Lesley Carline said: “This year’s AFS is very much a logical development from its predecessor whilst also recognising the unique obstacles to achieving full funding in 2020. The overall message remains broadly consistent with TPR’s objectives in 2019.
“However, the Covid-19 pandemic has had a catastrophic impact on the global economy, and many sponsors are currently struggling to secure their immediate survival. Additionally, with the Government unwilling to alter its existing Brexit schedule, it remains unclear what form the UK’s ultimate departure will take.
“Against a background of extreme uncertainty, it is very difficult for scheme sponsors to adopt a longer-term view and to agree recovery plans with trustees. We are encouraged that TPR has had the pragmatism to acknowledge the particular challenges facing DB schemes at this time to make appropriate allowances for them in the new AFS.
“It is vital that trustees and sponsors be given time to adjust and we are pleased that TPR has taken a realistic view of this.”
Commenting, David Everett, Head of Pensions Research at LCP said: ‘TPR is trying to strike a delicate balancing act between its general direction of travel in recent years, which has been to be ‘clearer, quicker and tougher’ with schemes and employers, and the need to avoid putting undue pressure on employers in the current environment’.
‘The latest funding statement still has elements of the new tougher approach, including expecting trustees to be vigilant if it seems that money that could have been used for the pension scheme has ‘leaked’. On the area of exercising flexibility on scheme valuation dates, TPR seems to be advocating against, unless this is demonstrably in the interest of scheme members’.
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