This puts schemes on a de-risking journey as they mature and should allow them to be ready to adjust to changing situations.
John Coulthard, partner at Aon, said: “Aon welcomes the clear focus on long term funding target (LTFT) and also the continuation of the Integrated Risk Management theme - including consideration of contingency planning for each of covenant, funding and investment. But this is a clearly tougher stance from TPR even where the covenant of a sponsoring employer is strong.
“There are other key themes that emerge from the statement. For example, it gives a strong preview of the new Funding Code to be consulted on later this year, while TPR continues to place strong emphasis on the equitable treatment of members compared to shareholders - particularly where dividends are increasing and where dividends exceed Deficit Repair Contributions.”
John Coulthard continued: “There is also a focus on long recovery plans (which average seven years) – and a tougher standard regarding what is ‘long’ than was previously the case. So, if you want to claim covenant is ‘strong’, be careful if you then choose a recovery plan period that is close to or longer than seven years, as the Regulator will expect a plan significantly shorter than average.
“In order to use the TPR examples, schemes will need to consider how mature they are; this is a new variable TPR has introduced to its examples. TPR is tougher on more mature schemes that should be closer to their long-term funding target. Hedging has been critical to how schemes have performed over the last inter-valuation period. Schemes that have had high levels of interest rate and inflation hedging have typically performed better and will have a smaller deficit issue to deal with this time compared to those with low levels of hedging.”
Lynda Whitney, partner at Aon said: “We also believe that contingent assets may play an important role in bridging the gap between technical provisions and LTFT. This will help ensure that schemes can have security while allowing for investment risk, and so additional returns can still be sought in order to help reach the long-term funding target.
“Trustees will need to manage the valuation timetable and late valuations should be avoided. But TPR is clear it will not use its powers to impose penalties if there are valid reasons. I believe this should give trustees the comfort they need in order not to accept an unreasonable deal because of an artificial deadline.”
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