Danny Vassiliades, partner at XPS Pensions said “Trustees are being reminded of the principles of good risk management across investment, funding and especially in employer covenant to help navigate through the current economic conditions, effectively buying time until they can be more confident of what the future holds. In any event, trustees should ensure that they are being treated equitably compared to other creditors, and will expect to participate in any employer’s recovery, when that time eventually comes.”
Steve Hitchiner, Partner at Barnett Waddingham said: “Collaborative working between trustees and employers is never more important than in times of distress, and we would echo TPR’s message that the key priority for many schemes is to understand how the sponsor’s ‘covenant’ has changed as a result of the Covid-19 pandemic.
“Schemes with valuation dates in March or April 2020 may have seen their funding position deteriorate materially – particularly those with high exposure to equity markets and without significant inflation and interest-rate hedging strategies. TPR has cautioned trustees against bringing forward their valuation date, and has highlighted the need to consider the impact on long-term investment returns with their advisers.
“On the other hand, schemes with 31 December 2019 valuation dates should consider the impact of post valuation experience before finalising their valuation.
“In either case, trustees may need to take a view on affordability at a time when many employers have been significantly affected by Covid-19. This can be difficult given the uncertain outlook, and whilst we agree with TPR that trustees should take some time to assess the outlook if needed, we would encourage trustees not to put off key preliminary valuation tasks, as this could store up problems for later."
Commenting on the Statement, ACA Chair, Jenny Condron, said: “Scenario testing is recommended, which we anticipate will be standard practice already for larger schemes but may challenge already strained governance budgets for smaller arrangements.
“There is also helpful reinforcement too of TPR’s expectations set out in their consultation on the new Defined Benefit Scheme Funding Code, and earlier, with a focus on agreeing Long Term Funding Targets with robust IRM frameworks to support them. Whilst TPR is clear that a strong employer is the best support for any scheme, where contributions have been deferred, Trustees must ensure that they share in any recovery”.
Darren Redmayne CEO of Lincoln Pensions commented: “The Pensions Regulator’s Annual Funding Statement reaffirms covenant as being centre-stage in the prospects for a DB scheme - its health is critical for their wellbeing and should not be taken for granted. In recent years, the benign environment was causing drift towards a one-size-fits-all approach to funding and risk.
However, as sponsors and trustees navigate this crisis, the benefit of the flexibilities in the current funding regime, in respect to the covenant, are being brought to the fore.”
“Although many trustees will want to support their sponsor through these difficult times, with Brexit and maturity risks also coalescing, the decisions they make in the next few years could have a material impact members’ pensions.”
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