This is just one of the expectations The Pensions Regulator (TPR) outlines in its Annual Funding Statement (AFS) 2022.
Trustees will be approaching triennial valuations at a time of high inflation, high energy prices, higher interest rates and slower economic growth – all of which may impact the scheme’s assets and liabilities, as well employer covenants.
It is unclear how the conflict in Ukraine and the sanctions imposed will affect UK schemes. A significant risk is the impact the conflict may have on the global economy. Schemes need to be alert to changes in liquidity demands and cyber risks; the longer term impact on funding positions could be significant. Employer covenants could also be affected by indirect impacts on their customer base, supply chain or financing costs. For many businesses these factors will be coming on top of the ongoing challenges of COVID-19 and Brexit.
The longer-term impact on future mortality trends as a result of COVID-19 continues to be a further area of uncertainty.
These risks should be managed within an integrated risk framework and an open dialogue with employers when assessing a scheme’s covenant.
David Fairs, TPR’s Executive Director of Regulatory Policy, said: “Favourable investment conditions over the last three years mean that many schemes’ funding levels are ahead of plan, but now is not the time for complacency.
“Conditions remain challenging for some schemes and employers and so we urge trustees to continue to focus on their long-term funding target and strategy.
“An actuarial valuation is an opportunity for trustees to review their funding plans and it may be a good time to seek future protections such as contingency plans and dividend-sharing mechanisms.”
The AFS notes that following a hiatus during the pandemic, TPR has seen an increase in employers returning cash to shareholders by restarting dividends, paying ‘special’ dividends and share buybacks. Trustees should be alert to this and consider whether their scheme is being treated fairly compared to other stakeholders.
Where schemes are in deficit against their technical provisions (TPs), trustees should focus on recovering the deficit. Where employers are experiencing short-term affordability constraints, trustees should carefully consider any requests to accept a temporary reduction in deficit repair contributions. TPR expects any such request to be short term, with higher contributions in subsequent years limiting any extension to recovery plan end dates, and will continue to view shareholder distributions as being inconsistent with the scheme receiving lower contributions.
Where schemes are in TP surplus and have appropriate journey plans, trustees should ensure their liquidity needs are covered and focus on managing risks through contingency planning.
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