Alan Collins, Head of Trustee Advisory Services at Spence & Partners, said:
“The regulator’s funding statement is now a firm fixture in the pensions calendar and this year’s instalment has given trustees, sponsoring employers and advisors plenty of food for thought. It is also clear that 2015 valuations will contain more bad news than good. The regulator’s own analysis shows that ‘despite all major asset classes having performed well and schemes having paid £44 billion in deficit repair contributions over the last 3 years…many schemes with 2015 valuations will have larger funding deficits’ and that ‘most schemes will set funding strategies based on lower expected returns than at their last valuation’.
“However, the statement also acknowledges the current challenging economic environment and the potential impact of the new pension freedoms, where significant levels of transfers could affect the funding level of DB schemes.
“We would flag five essential takeaways from this year’s funding statement for trustees to act upon:
1. A modern approach to scheme funding should involve trustees receiving stochastic modelling from their advisor. As well as allowing trustees to analyse in detail the risks and rewards of various funding strategies and asset allocations, stochastic modelling is essential to understand both the range and the likelihood of outcomes of different economic scenarios;
2. Recovery plans should be underpinned with a clear contingency plan. It is no longer realistic to set a long-term recovery plan without an idea of what will happen if actual experience is significantly better or worse than expectations;
3. Ultra-long recovery plans for mature schemes must be clearly justified and documented. Trustees of mature schemes with 30+ year recovery plans, which have less time to their ‘end point’ will be questioned by the regulator. We suspect that such schemes may also come under increasing pressure from the regulator to closely examine whether or not they remain viable;
4. Up-to-date valuation information is vital. Annual or triennial valuations are no longer good enough to manage schemes. The regulator is clear in its statement that trustees ‘should actively monitor the impact of market conditions on their scheme risks’ and recent volatility also confirms the importance of trustees, advisors and fund managers being on top of market movements;
5. Covenant will be key for struggling employers. A clear understanding of the employer covenant is central to the trustee risk management process. Where affordability is constrained and where previous levels of contributions cannot be maintained, trustees should consider options such as seeking mitigation with additional security or a differently structured recovery plan, understanding how the employer’s future plans will impact the covenant and ensuring that the scheme is treated fairly relative to other stakeholders in the employer’s business.”
Collins added: “This year’s funding statement gives a clear articulation of what the regulator is looking for from scheme trustees and sponsoring employers. While 2015 valuations will present many challenges, trustees should have an increasing number of tools in their armoury to tackle these effectively and ultimately improve the security of members’ benefits over the longer term.”
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