Aon has said that the latest Annual Funding Statement from the Pensions Regulator makes a clear direction to schemes to improve their planning and monitoring of wider business developments, while also being ready to adjust to changing situations. Aon believes that both trustees and employers will need to factor this into their business plans, also recognising that the Regulator appears willing to be both more active and more directive.
Matthew Arends, partner at Aon, said: "There are two big picture messages in the statement. First, actuarial valuations need to go beyond simply setting contributions to include implementing plans to manage risks to the scheme. Second, "fix the roof while the sun is shining" either now or in the future. The Regulator expects higher contributions or more security from employers now - if they can afford it - but otherwise enforceable plans for contributions to increase, if and when that becomes possible in the future. The Regulator recognises that on average schemes will be better funded this time round – but rather than resting on laurels, now is the time to get busy with long term plans.
“One specific example is the increased emphasis the Regulator places on the fair treatment between the pension scheme and other stakeholders, particularly dividends to shareholders compared to deficit contributions. The Regulator is saying that trustees should not agree the valuation outcome if they believe that the pension scheme would be disadvantaged by it.”
Matthew Arends added: “We expect more emphasis on planning for future valuations not just the current one, on documenting contingency plans, and on analysing deficit contributions against dividends and overall employer distributions."
Lynda Whitney, partner at Aon said: "This is the first announcement from the Regulator since the Department of Work and Pensions White Paper, and the Regulator will still need to consult on a new Funding Code probably in late 2018, but they are perhaps doing the groundwork by referring to action to take on "weak technical provisions" in some examples in this statement. Trustees and employers need to consider prudence levels in 2018 valuations in anticipation of future changes.
“The Regulator is increasing its focus on transfer activity by recommending trustees monitor the level of transfers, record the regulated financial advisers being used, and seek advice on liquidity management. High levels of transfer activity combined with maturing schemes can increase a scheme's cash outflow - and schemes need to know how they will manage their liquidity even if there is also adverse investment performance.”
TPR’s has issued its 2018 Annual Funding Statement, setting out how it intends to regulate defined benefit pension scheme valuations with effective dates between 22 September 2017 and 21 September 2018.
Patrick Bloomfield, Partner at Hymans Robertson, said: “Frank Field’s shockwave throughout the pensions industry is continuing to take tangible form and nothing in TPR’s Annual Funding Statement comes as a surprise today.
“Businesses with pension schemes will continue to be pushed to improve funding and reduce risk more quickly than before. The actions TPR calls for are targeted based on different business and scheme circumstances, but the message is consistent across the board: “get on with funding schemes whilst sponsoring businesses are still there to pay for them”. This continued pressure to increase contributions and seek contingency plans that cover remaining risks is designed to give businesses nowhere to hide if pension scheme funding doesn’t improve in the coming years. Given the pace at which pension schemes are maturing, it’s hard to argue against TPR’s direction of travel.”
Commenting on what the Annual Statement will mean for pension scheme sponsors, Patrick Bloomfield added: “Whilst TPR’s direction of travel may be hard to argue with, the force with which this is being put forward is debateable, particularly for stronger employers. The point of view that an employer being strong today doesn’t mean it will be there forever is valid, but there is a range of solutions. TPR’s guidance that trustees should pay more attention to the risk of sudden business demise and agree contingency plans such as security packages to protect schemes would provide a more balanced approach than
simply pushing for higher contributions in many cases.
“There is an inherent political inconsistency of wishing that more businesses still offered final salary pensions and an increasingly aggressive regulatory regime for funding final salary schemes. Directing more of any business’s spending into funding defined benefit deficits will have unintended consequences, such as exacerbating the generational inequalities of older workers’ generous final salary pensions compared to today’s workers’ defined contribution pensions.”
Commenting on how this will impact trustees, Patrick Bloomfield continued: “There is a treasure trove of gems in this year’s Annual Funding Statement that will shift trustee behaviour. Trustees are being instructed to keep records of transfer activity and consider stress tests to make sure their scheme can withstand transfers out. To prevent transfer values becoming a tool to massage down valuations, trustees are being told to get employers to underwrite lower than expected transfer value take-up. This puts transfer out on a par with allowing for speculative investment returns, in that it can be done but employers are being forced to stand behind the outcome.
“Being a ‘small scheme’ isn’t a justification for underperforming trustees. We’re delighted to see TPR take the tougher stance on this. An individual’s lifetime of retirement savings shouldn’t be put at risk simply because they worked for a smaller business.”
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