Clearer, quicker, tougher – a new approach
04 Dec 2017 - Estimated reading time: 5 minutes
Defined benefit (DB) scheme funding continues to make headlines and we have been clear that the majority of DB schemes will be able to meet their pension obligations as they fall due.
We acknowledge that these are challenging times for schemes, and that some are in a stressed state, but our research shows there is not a fundamental funding crisis across the DB landscape.
However, we have continued to use our powers to protect member benefits. In the past year, we have reached a number of high profile settlements including BHS, Tata Steel and Coats, amounting to more than £1bn recovered for pension savers in total. This has increased our media profile and encouraged a greater scrutiny of our actions.
We welcome this focus which shows we are striving to be clearer, quicker and tougher in what we do.
When a scheme submits its triennial valuation it must also supply a recovery plan if the scheme is in deficit. Where we don’t get a valuation back within the deadline we will be quicker and tougher to move to use of our powers and issue the trustees and employer with an improvement notice and third party notice respectively. If they don’t then get their valuation back to us, we can levy a fine.
Where we feel trustees and employers are not able or not willing to progress a valuation, we will now be tougher by using our powers to obtain a skilled person’s report to help break the stalemate and get the valuation agreed. We used a skilled person in this way for the first time in the Hoover case and it was very effective.
We have also recently issued a warning notice using section 231, until now a rarely-used power, which allows us to, for example, impose a schedule of contributions, set the length of a recovery plan or determine the assumptions to be used in calculating a deficit. We have a number of cases currently under investigation where we are also actively considering the possibility of using our section 231 cases.
We are also being clearer and more directive about what we expect from trustees. For DB schemes, this means trustees managing key risks in an integrated way and take necessary action to secure the fair treatment of their scheme.
Trustees and employers who are exhibiting poor behaviours need to step up and improve or face regulatory action.
At Hymans Robertson we are involved in a wide range of valuations with varying levels of tPR engagement. It is clear from these cases, and across the industry more generally, that many trustees and companies are concerned about facing more questions and scrutiny than before. So what five practical steps can you take to be prepared…
- Plan carefully to avoid unnecessary delays and ensure your valuation is submitted on time. Administrators should be encouraged to provide data swiftly after the valuation date and, if things don’t run to plan, then parties should proactively engage with the Regulator.
- Clearly document objectives, overall strategy and decisions. Ensure a good audit trail exists that demonstrates that the current Regulator guidance has been taken into account and allows you to respond accurately and comprehensively to any questions.
- Seek appropriate advice to set an integrated strategy that carries a level of risk which the sponsor’s covenant can support. While the optimal strategy will be scheme specific, our 3D Funding approach focusses on demonstrably improving the security of members' pensions.
- Trustees and sponsors should work together to find the best funding solution taking heed of this stronger stance from the Regulator. Could engagement and information flows be improved?
- Explore the risks that might knock plans off course and ensure contingency plans are sufficiently clear, substantial and supported by effective monitoring.
Ultimately being better prepared and being able to evidence effective risk management should help avoid unnecessary scrutiny and cost. This is something we can support with our 3D Funding approach – making any engagement with a tougher, more energetic Regulator much less painful.