Commenting on the Statement, ACA Chair, Jenny Condron added: “We are seeing a step change in that the Statement for the first time includes expectations on investment strategies and examples of scenarios with scheme types being segmented by maturity as well. As expected, there is a growing focus on establishing and agreeing long term objectives - a positive step as Technical Provisions often fall significantly short of a sufficient run-off funding level. It is important however that such plans address demographic risk as well an investment risk as the scheme moves toward this type of long-term target.
“As ever, the proof of the pudding will be in the eating and how its content will influence sponsors, trustees and the workings of the Regulator, where recent – often unfair – criticism has pushed them to a view that they must be seen to be ‘tougher’ in their defence of DB members’ benefits. We note the Regulator is looking for Trustees to evidence and justify departures from the expectations set out in the various scenarios set out in the Statement, which will need appropriate advice and input from their actuaries and other advisers.
“Sponsors, trustees and their advisers need to be assured that the changing approach will not herald an overly inflexible one and that the Regulator will remain proportionate in using its powers, particularly those situations where employers are engaged in corporate restructuring – often with the specific aim of enhancing the organisation’s future prospects and therefore the covenant supporting the pension scheme. Identifying a fair balance between competing calls on employer resources must remain largely a decision taken at company level, taking due note of advice and after proper processes have been followed. The Regulator must not be tempted to second-guess on a ‘we know better’ basis – an approach that would inevitably lead to new but different mistakes arriving at the Regulator’s door.”
Dan Mikulskis, partner at LCP, comments:“Our experience aligns with what the regulators says in that a feature of schemes that have achieved good results over the last few years has been collaboration between sponsor and trustees around a long term objective that they can fund and invest toward.
“The regulator’s focus on investment, covenant and funding continues a lot of the guidance that they have issued around Integrated Risk Management (IRM) and we’d agree that addressing these three considerations in a joined up way is vital to maximising the chance of members benefits being paid.
“Schemes have experienced a tailwind with regard to funding in recent years, which has brought long term objectives into focus for many schemes. In some ways this statement from the regulator looks to bring the whole universe up to the level of best practice.
“One big benefit of having a clear long term objective set is the ability to react promptly and efficiently to unexpected news both good and bad, and we have seen this time and again with our clients in recent years as they have been able to make the most of good asset performance, and make significant moves toward their endgame which might include reducing their dependence on growth assets or undertaking a de-risking transaction.
“Flexibility has always been a feature of the pensions regulation regime, and what’s interesting here is the regulator looking to be more specific about when they consider it appropriate for flexibilities to be used, for example depending on covenant strength and maturity. We agree with this, as our experience shows there is a very wide range out there of scheme circumstances, so a one size fits all approach wouldn’t be appropriate.
“True integrated risk management is difficult - it is a tricky job to seamlessly integrate the different outputs from the investment, funding and covenant advisory processes and it can be hard to know what trustees can do to react to changes in sponsor covenant and what this should mean for the investments. However we support the continued focus on this as it’s only by looking at these three lenses together that we can deliver members benefits most effectively.
“For weaker sponsors, there is always going to be a very difficult balance to be struck between the interests of pensioners and the ongoing solvency of the company. It is a hard area to regulate but we believe it is important to recognise that in many cases pension scheme trustees are a key stakeholder in the ongoing company, and should be recognised as such - the expectations suggested by the regulator around dividend payments help to achieve this.”
|
