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Marian Elliott, Managing Director, Integrated Actuarial at Redington said:“The Pensions Regulator (TPR) issued their 2019 annual funding statement earlier this week. This statement marks the start of a more prescriptive approach from TPR which is likely to be cemented in the DB funding code later this year. |
So, what are the 5 key takeaways from the 2019 statement?
1. The rise of the Long-Term Funding Target (LTFT)
“For the first time, TPR explicitly sets out their expectation that trustees, and sponsors should set a Long Term Funding Target and, importantly, the need to evidence how shorter-term investment and funding strategies are aligned with the LTFT. TPR also highlights the Government's policy intent to make the LTFT a requirement. This underlines the need for joined up advice from covenant, investment and actuarial advisors, to ensure the targets selected are appropriate, and that all stakeholders understand and are comfortable with the impact on short-term funding and investment policies.
Key Takeaway: “For any schemes which don't have a LTFT in place yet, discussions between the sponsor and trustees should start in good time to agree a target which takes into account scheme maturity and covenant strength. The approach to funding Technical Provisions (TP's) should be consistent with this, and there should be a plan to move from full funding on a TP basis towards the LTFT once this interim target has been reached. Key Takeaway: “Be clear about why an investment strategy or funding plan has been adopted and evidence that risks have been considered adequately. A great way to do this is using a clear framework, kept front and centre, with scheme specific objectives and metrics.
3. Scheme maturity is important
Key Takeaway: “Don’t get too hung up on working out whether your scheme is ‘mature’ or ‘immature’. The important consideration is the proportion of assets your scheme pays out each year. In most cases, it makes sense to steer towards a low volatility strategy by the time a scheme is paying out 3-4% of its assets in cash each year. This is because it is much harder to recover from adverse events, when the pool of assets required to generate the return needed to ‘catch up’ is reducing.
Key Takeaway: “Assess the impact that the payment of dividends will have on the employer’s ability to fund the scheme and consider whether the scheme is being treated fairly. Any concerns in this area should be raised with TPR before agreeing a valuation.
Key Takeaway: “Ensure that appropriate risk analysis has been carried out to justify the funding and investment approach taken. Keep records of engagement between the sponsor and trustees, including the reasons behind decisions on funding and investment policies. Comparison of long-term risk metrics such as ‘probability of paying pensions’ or ‘expected loss on sponsor insolvency’ under alternative scenarios can be very helpful when justifying an approach to TPR.” |
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