- Pension schemes reporting this year are likely to be under greater pressure than those reporting last year;
- Deficits are expected to be much higher than they were at the last valuation for these schemes three years ago;
- Parliament is expected to give tPR a new objective this year to consider the financial sustainability of employers in its regulation of defined benefit schemes;
- Hymans Robertson hopes that comments expected to be made by tPR on the use of “marked to market” for valuing liabilities are not misinterpreted as a licence to go back to subjective higher risk liability measures;
- Hymans Robertson also encourages tPR to be clearer and more consistent about the risk management activities it expects from Trustees
Martin Potter, Partner at Hymans Robertson said: “Any day now we expect tPR’s annual statement in which they will report back on pension scheme valuation trends. Last year’s statement said that deficits were manageable for most schemes. This year we think many more schemes will be stretched by the financial conditions. We estimate that typical scheme valuations this year will reveal bigger deficits than three years ago. This will require deficit contributions at least as high as they are now and possibly for a lot longer.
“In the main tPR’s policy statements each year have become more holistic and more in tune with the real situations facing trustees and sponsors. The top level policy intent has not however always fed through to the actual experience of schemes’ individual dealings with tPR. This year`s “development need” would therefore centre round a plea for a commitment to more consistency in the application of, generally laudable, policy intents.
“We already know tPR will be getting a new objective this year to consider the financial sustainability of employers. We also know we’re not going to see permission to smooth financial parameters being added into tPR guidance. This was firmly rejected by the pensions industry as a lesson already learnt the hard way. Besides, when you have to smooth back further than five years to get better looking answers it does rather feel like you’re on a fishing expedition.
“We expect tPR may nevertheless feel the need to comment on the use of “marked to market” parameters for valuing liabilities. For maturing pension schemes looking to match their cashflows more closely this is more and more important for measuring liabilities. We hope therefore that any comments tPR makes are not mis-interpreted as license to go back to subjective higher risk liability measures. This could move some schemes further away from the pressing job of building up sufficient funds to meet their growing pension payments.
“On a positive front, tPR has been focussing more on risks in pension schemes. They have been looking at how schemes assess covenant strength and also working alongside some of the larger and riskier schemes on their valuations. We expect there will be more support along these lines. However, it would be good to hear what useful lessons come out of this that could benefit all schemes. Some insights into more innovative contribution settlements, e.g. linked to company metrics, would also be useful.
“In last year’s statement, tPR said it wanted to see more trustees setting up “integrated” funding plans that look at funding, investment and covenant strategy together. This left many schemes confused about what they meant. We would like tPR to be clearer on what they expect from trustees and their risk management activities. If they think schemes should carry out more “value at risk” modelling they should say so. Since there is such a diversity of schemes out there they should think about what modelling and analysis is right for big vs small schemes and also for different types of investment strategy.”
|
