As featured in Professional Pensions*

The Pension Regulator's (TPR) Annual Funding Statement (AFS) for 2017/18 makes it clear that the Frank Field shockwave is continuing to take tangible form across the pensions industry. Building on last month’s White Paper from the DWP, TPR have set out their stall on what they expect from UK pension schemes and business practice. It is widely expected that this statement will serve as the forerunner for a new code of practice that will usher in stiffer implementation of the UK pensions regulatory regime.

Businesses with pension schemes will continue to be pushed to improve funding and reduce risk more quickly than before. The actions TPR calls for are targeted based on different business and scheme circumstances, but the message is consistent across the board: “get on with funding schemes whilst sponsoring businesses are still there to pay for them”. This continued pressure to increase contributions and seek contingency plans that cover remaining risks is designed to give businesses nowhere to hide if pension scheme funding doesn’t improve in the coming years. 

The inevitable backlash from the business community is unlikely to curry favour, in light of corporate failures such as BHS and Carillion. How share prices of businesses with material pension schemes react will be an interesting test of how well TPR has trailed the strength of its position. However, given the pace at which pension schemes are maturing, it’s hard to argue against TPR’s direction of travel.

Parliament has tasked TPR to balance the irreconcilable objectives of protecting pension scheme members (and the Pension Protection Fund) against maintaining sustainable business growth. This statement marks the strong shift towards protecting scheme members, primarily at the expense of shareholders. TPR has been consistent in advocating fairer treatment for pension schemes relative to shareholders for some time, so this isn’t new. But TPR is being more vocal about its view of what “fair treatment” means, with the threat of using its powers to intervene where trustees don’t do what’s necessary.

Nothing in TPR’s 2018 AFS will come as a surprise to pensions industry experts. The content is entirely consistent with how we’ve seen TPR intervene in pension scheme valuations over the last year. This is a public display to restore confidence and whip industry laggards to catch-up with best practice. The continued pressure to increase contributions and seek contingency plans that cover remaining risks is designed to give businesses nowhere to hide if pension scheme funding doesn’t improve in the coming years. 

The impact for sponsors

Whilst TPR’s direction of travel may be hard to argue with, the force with which this is being put forward is debateable, particularly for stronger employers. The point of view that an employer being strong today doesn’t mean it will be there forever is valid, but there are more effective solutions. TPR’s guidance that trustees should pay more attention to the risk of sudden business demise and agree contingency plans to protect schemes provides a more balanced approach than simply pushing for higher contributions in all cases. 

The political inconsistency of wishing that more businesses still offered final salary pensions and an increasingly aggressive regulatory regime needs rethinking. Directing more of any business’ spending into funding defined benefit deficits will have unintended consequences, such as exacerbating the generational inequalities of older workers generous final salary pensions compared to today’s worker’s defined contribution pensions.  

Perhaps it’s Brexit-mania, but even TPR is telling pension scheme trustees that for 2018 pension scheme valuations, no deal is better than a bad deal. I expect TPR would rather that trustees miss a valuations’ 15 month statutory deadline giving them the opportunity to negotiate directly with the business itself, armed with its powers to intervene. Only the desperate and the foolish would choose to negotiate with a regulator they know holds the whip hand and has the power to recharge you for its expert advice costs.

How will this impact trustees?

There is a treasure trove of gems in TPR’s statement that will shift trustee behaviour. Trustees are being instructed to keep records of transfer activity and consider stress tests to make sure their scheme can withstand transfers out. To prevent allowing transfer values becoming a tool to massage down valuations, trustees who are thinking about allowing for transfers out are being told to get employers to underwrite lower levels of take-up. This puts transfer out on a par with allowing for speculative investment returns, in that it can be done but employers are being forced to stand behind the outcome.

The widely reported slowdown in life expectancy improvements has been a critical area for pension scheme valuations in recent years, commonly reducing liabilities by as much as 5%. TPR’s direction to trustees on longevity is clearer than ever, that anything less than life expectancies which are tailored to a scheme’s socio-economic profile isn’t good enough. Trustees who have resisted thus far to adopt market leading services like Club Vita will likely have to revisit this decision in 2018.

Pension scheme consolidation was a major theme in the DWP White Paper, but has a more subtle herald call in TPR’s AFS. Being a ‘small scheme’ isn’t a justification for underperforming trustees. We’re delighted to see TPR take the tougher stance on this. An individual’s lifetime of retirement savings shouldn’t be put at risk simply because they worked for a smaller business. The game is up for smaller schemes, either run yourselves properly or if you’re not willing to or can’t justify the cost then look at the existing consolidation offerings who will do it for you. TPR is backing this up by writing to the trustees of smaller schemes so that they are in no doubt about what’s expected of them.