Steven Taylor, ACA Chair on the TPR Statement issued today: "Today’s Annual Funding Statement will be eerily familiar to those who have followed the evolution of TPR’s approach and guidance in recent years. With funding levels now significantly better than in the past, TPR builds on last year’s statement by adding further “endgame” focus with Trustees now expected to articulate clearly how they will navigate the key strategic options available to them. TPR also makes notable new reference to considering how discretionary increases might be impacted by insurance transactions and also adds further focus on climate risk and sustainability.
“Overall though today’s statement remains a “holding page” to new guidance expected soon on the new funding regime. This is where it will hopefully become clear how TPR’s approach could change for the next traches of valuations.
Simon Kew, Head of Market Engagement at Broadstone, commented: “The Regulator’s latest update on the DB market suggests that half of schemes are likely to have surpassed their estimated buy-out funding levels. Whilst this estimate sounds slightly optimistic, it nevertheless demonstrates the radical transformation in the funding position of many pension schemes over the past couple of years.
“The insurance market is running hot with new entrants, a freshly active commercial consolidator and an ongoing consultation into a public sector consolidator. Many larger schemes may also consider the potential for running on as a viable alternative to buy-out after reaching low dependence on the employer’s support if they can get access to the surplus.”
Laura McLaren, Head of DB Actuarial Consulting, Hymans Robertson, said: “With DB funding holding strong and a new funding code coming later this year, it’s not a surprise to see this year’s statement significantly scaled back.
“Whereas past statements have centred on repairing deficits, fewer schemes remain in those regulatory crosshairs. Therefore, most of the statement is about encouraging trustees to develop endgame strategies. The content echoes the shift in schemes starting to think beyond being funded on a solvency basis – as we’ve also seen reflected in the recent ‘options for DB’ consultations.
“Schemes are positioned to make decisions that could materially affect member outcomes. So it’s good that TPR is highlighting the growing range of endgame and consolidation options, and directing trustees to robustly consider the full spectrum, including alternative arrangements where appropriate.
“We agree with TPR that the economics of running on are likely to be more attractive for larger schemes. We support the broader steer to explore a scheme’s own circumstances, objectives and beliefs.
“Risks, ongoing expenses and discretionary increases are all sensible factors to consider. It was surprising, however, to see very little emphasis on the importance of building consensus between the sponsoring employer and trustees, as this approach is likely to lead to the best outcomes.
“Given how much the DB landscape has changed, trustees and sponsors are going to need a lot of support to carefully weigh up a decision between run-on, buy-out or an alternative.”
Chris Heritage, Director at Cardano, said: “The Annual Funding Statement serves as a helpful reminder for trustees to proactively review their journey plan to ensure that it remains appropriate in the context of the scheme's funding position and the latest view of covenant strength.
“We are pleased to see reference to the importance of considering climate change and wider sustainability issues as part of this reassessment of scheme strategy; in particular the impact on the employer covenant or prospective insurer counterparties (an area which often can be overlooked).
“Similarly it is reassuring that TPR is encouraging trustees to robustly assess the growing number of options available in the market (including run-on, insurance solution, consolidators, capital-backed journey plans) based on the specific risks and benefits in the context of the security of members' benefits.”
Matthew Arends, partner and head of UK retirement policy at Aon, said: “It’s reassuring that The Pensions Regulator (TPR) has recognised the very significant improvement in most schemes’ funding levels in recent years. This has been reflected in the Annual Funding Statement which is much shorter than previous years - 1,700 words instead of 4,200. That is to be applauded but is also probably a reflection of it being something of a stop gap before the Funding Code comes out.
“It may place an even stronger spotlight on the question of why TPR is still implementing a new Funding Code and funding regime that will be brought in later in 2024?”
Matthew Arends continued: “There is also a confirmation that run-on - with generation of surplus – as well as consolidators and other vehicles are now reasonable options for schemes, alongside buyout. It may be that it is larger schemes that are more likely to run-on because they can afford to and can access economies of scale, but this guidance reflects the now increased likelihood of that approach.
“There is also mention of value from private market investments - although only in the section in respect of schemes funded between Technical Provisions and Buyout funding levels - and which could be a nod to the wider initiatives proposed by Government and in the Mansion House Compact”.
Katie Lightstone, Pensions Employer Covenant & Restructuring Partner at PwC said: “The Pensions Regulator strikes a notably different tone in this year’s Annual Funding Statement, with a greater focus on schemes running on to generate surplus to benefit members and sponsors and encouragement for schemes to review granting discretionary increases.
“Many schemes now have the luxury of being sufficiently well-funded to choose from the wealth of innovative routes to securing benefits. As a minimum, TPR encourages all schemes to review the options available against the backdrop of their existing covenant and document their review, even if the approach is ‘wait and see’. We’re finding an approach considering the probability of members receiving benefits incorporating scheme and covenant risks is a helpful lens through which to consider such options.
“Given improved funding positions, TPR is seeing an increasing number of trustees being asked to accept reduced or suspended contributions. In our experience such decisions are tricky for trustees, and require an assessment of covenant outlook combined with potential future scheme stresses. There’s a timely reminder of the risks impacting schemes and sponsor covenants and that decisions should be supported by robust risk analysis, taking into account challenges like climate change and geopolitical instability.“
Jane Evans, Partner at EY, comments: “Today’s annual funding statement from The Pensions Regulator highlights the expanding range of options for trustees to consider; from running-on instead of buying-out to alternative end game solutions. The regulator is also clear that trustees need to consider the potential impact of climate related risks on some covenants – something the UK pensions market will largely welcome.
“Covenant remains an important consideration for all schemes – even those that are well-funded. Risks from data reliability, buy-out market capacity and pricing volatility, illiquid realisations and legal issues can delay the path to buy-out and leave schemes exposed to member benefit cuts if a sponsor fails. The current surge in corporate insolvencies highlights that things can, and do, go wrong for sponsors, and changes driven by climate or nature related factors will only increase risks for companies in the coming years.
“This means that better funded schemes can’t eliminate their covenant reliance and need to ensure a proportionate approach to evaluating and tracking ‘covenant horizon’ risks that could threaten member benefits if things don’t go to plan.”
Paul Kitson, Head of UK Pensions Consulting at EY, adds: “With around £700bn of UK pension schemes exceeding buy-out funding and many others expected to arrive this point soon, we are seeing a growing appetite from employers and trustees for options beyond buying-out, including using Defined Benefit surplus to improve outcomes for current employees who have Defined Contribution pensions. It is critical that employers and trustees have a robust framework for assessing all options and – where an alternative approach to buy-out is followed – for managing the scheme during the run-on.”
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