By Sankar Mahalingham, Head of DB Growth, Xafinity Punter Southall
It has
• Changed its tone regarding funding;
• Renewed its emphasis on Integrated Risk Management (“IRM”); and
• Confirmed it’s likely to be much more interventionist than was previously the case.
TPR has been proactively engaging with a subset of larger schemes for some time, working with these schemes before and throughout the valuation process. However, there has been recognition from TPR that it has not devoted much of its attention to smaller schemes.
TPR is keen to change this but it has limited resources, which it has to utilise in the most proportionate way. Therefore, last year TPR set about a process of consultation on the way it deals with small schemes; one would expect small schemes to be those with assets in the tens rather than hundreds of millions of pounds.
The agreed approach is now to write to a sample of these schemes (50 in the first year but increasing over time) and provide a questionnaire, likely with a covering letter at the outset of the valuation setting out TPR’s view on the covenant and matters that it wants the trustees to consider. The first letters are already being sent. The idea is that this will be filled in by the trustees throughout the process and submitted alongside the valuation results. There will be a similar control group who will not be contacted to compare the outcomes between those left to their own devices and those where there is more intervention.
As well as asking about the overall IRM framework and whether it contains triggers for formal automatic action, the questionnaire asks about the different areas of risk. It indicates that trustees should take a “comply or explain approach” to assessing the employer covenant. It envisages that explicit consideration should be given to the affordability of pension contributions and potential for any group support. The trustees are also asked about investments, in particular:
• When they last actively reviewed the suitability of their investment strategy;
• How they identify and assess their key investment risks; and
• How they considered factors such as the maturity of the scheme’s liabilities and the ability of the employer covenant to support the
investment risks when determining the investment strategy.
On the funding side, the Trustees are asked about secondary funding objectives, and the frequency of review of the funding level.
These developments suggest that schemes of all sizes will be expected to have more tangible IRM frameworks than has been the norm up until now. This should be seen as a positive development. If properly created, they encourage easier decision-making and monitoring frameworks. This increases the likelihood of there being the proper focus on the benefits and risks of short-term flexibility in the risk management approach and how this might impact on the long-term objective for a scheme.
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