Paul Houghton, Head of Actuarial Consulting at Barnett Waddingham, welcomes the regulators message: “The Regulator’s message couldn’t be any clearer. Before shareholder dividends are favoured over fixing pension scheme deficits, the Regulator expects trustees to be have agreed a strong funding target and a short recovery plan. In the most stressed cases, TPR expects “payment of shareholder distributions to have ceased”. The consequences of not doing so will only become more tangible as TPR’s powers are expanded.
“With the Government intending to legislate so schemes are required to set a Long Term Funding Target, TPR is also giving a definite steer as to how its revised Code of Practice will reflect trustees’ new obligations. DB scheme trustees should therefore take note that, if in the midst of a funding valuation, the Regulator expects to see them initiate discussions with scheme sponsors even before the updated legislation is laid. At the same time it would be judicious for trustees, working with their advisers, to assess their scheme’s maturity and risk profile, so they may figure out where they sit within TPR’s risk matrix – and therefore understand fully what the Regulator expects.
“Moreover, TPR has made it abundantly clear that trustees will be asked to provide evidence that their shorter-term strategies are aligned with their long-term objectives – or be prepared to explain why not.
“There is nothing new or surprising in today’s statement – it is consistent with the messages TPR has been giving to the pensions industry since the publication of the White Paper in early 2018 and the strategic long-term approach to running pensions scheme very much tallies with the way we operate at Barnett Waddingham. Nevertheless we look forward to working with TPR and the Department for Work and Pensions in improving the DB funding regime so employers, trustees and members have an even better idea where they stand.”
Commenting on The Pension Regulator’s Annual Funding Statement, Patrick Bloomfield, Partner, Hymans Robertson says:“TPR continues to set out its stall for tougher regulation of DB pension schemes, in light of high profile corporate failures like Carillion and BHS. This year’s annual funding statement is absolutely in line with what TPR pushes for when it intervenes in pension scheme valuations. By segmenting businesses and schemes into categories, TPR is able to be more directive about what it expects. This is the clearest indication of the direction of travel for the new regulation for pension scheme funding, which are expected in 2020.
“Businesses with pension scheme valuations this year will be under considerable pressure to pay higher contributions to their pension scheme. This will be incredibly unwelcome for those who are wrestling with tough trading conditions or Brexit related uncertainty. If businesses are struggling, TPR will be highly likely to intervene to put the interests of pensioners ahead of investors.
“TPR has irreconcilable objectives to support businesses’ sustainable growth and protect the PPF (the pensions lifeboat used in business failures). The government is considering whether new “consolidation” options could provide a cheaper alternative for ailing businesses. Further details are expected later this year, following a DWP consultation.
“This statement is unlikely to cause a major stir for trustees at the leading edge of best practice. They will already have a long-term plan for their scheme and be shifting into investments that match pension payments more closely. However, lots of trustees will need to up their game to catch-up. All trustees are going to have to work harder to demonstrate to TPR that the risks they are running can be supported by the business their scheme relies on.
“TPR’s is giving investment risk much greater scrutiny, which is entirely appropriate as it has not received enough scrutiny in the past. As TPR does not have any powers explicitly relating to pension scheme investments, it continues to have to influence through pension scheme valuations to bring.”
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