Commenting on TPR’s Annual Funding Statement 2021/22, Laura McLaren, Partner, Hymans Robertson says:

“Today’s Annual Funding Statement is unlikely to cause a major stir, given that TPR’s been trailing many of the key points for some time. Nevertheless, there are some useful prompts on how defined benefit schemes should be approaching 2022 valuations in the current landscape. Recent market performance means funding remains on track for many – and an increasing number of schemes will be approaching fully funded on a technical provisions basis – but events of the last few years are a reminder that things can, and do, change quickly. We’re therefore supportive of the overarching message to trustees and sponsors to focus on developing robust long-term plans and managing risks.

“It’s no surprise that the Russian and Ukrainian conflict, as well as the lingering effects of COVID-19 and Brexit, are notable themes. High inflation and slowing economic growth will impact the outlook for scheme assets and liabilities. They will also be key drivers of employer covenant and how much employers can pay in pension contributions. Whilst there may be limited impact on many businesses and sectors, others will be feeling the squeeze – particularly those that are heavily exposed to Russian or Ukrainian commodity markets or have impacted supply chains.

“With so much uncertainty, it’s hard to see many schemes emerging from 2022 valuations without more defined contingency plans in place. This has been best practice for some time but is increasingly becoming more commonplace. So, expect to see more triggers to kick in cash linked to items like funding falling behind plan or changes in shareholder distributions.

“On the liability calculations themselves, there are warnings to take care if building in ‘off market’ inflation adjustments, but there is now recognition that allowing for a slowdown in longevity relative to pre-COVID expectations can be reasonable. It seems clearer that the pandemic now represents a previously unanticipated headwind – both in terms of mortality directly related to COVID-19 and the knock-on effects on health care systems and the wider economy. As such, we are pleased to see that TPR has softened last year’s early ‘hang fire’ stance on longevity slowdowns, and will accept liability reductions of up to 2% relative to pre-COVID expectations can be justified.

“TPR continues to focus on the equitable treatment of the pension scheme, with clearer steers than in previous years on their view of reasonable shareholder distributions relative to deficit recovery contributions. Shareholder distributions should only exceed deficit recovery contributions if the pension scheme has a strong funding target and a relatively short recovery plan (under 5 years is given as an example). Whilst this provides some more clarity for corporates, uncertainty does remain as “strong” and “relatively short” are not defined.

“Finally, TPR’s new funding code of practice only gets the briefest of mentions and only to confirm that the second consultation on the draft code is still expected to be launched later in 2022. Therefore, whilst TPR continues to consistently signpost its direction of travel in statements such as this, trustees and sponsors will need to wait a bit longer for the long-awaited final detail to emerge.”