TPR’s Annual Funding Statement: implications for trustees and sponsors
03 Apr 2019 - Estimated reading time: 5 minutes
We recently ran a webinar to discuss The Pensions Regulator’s (TPR) 2019 Annual Funding Statement (AFS). Our experts were joined by Neil Bull, Investment Consultant at TPR, for an insightful discussion covering:
- The key messages in the AFS
- Implications for trustees and sponsors
- Direction of travel for funding regulations
Here, we outline the key messages from the AFS and what this means for you.
Key messages in the 2019 Statement
With TPR continuously becoming ‘clearer, quicker and tougher’, the 2019 AFS explicitly sets out what they expect trustees to consider to better manage risks and avoid regulatory intervention.
There were 4 key messages from this year’s AFS which must be taken into consideration:
- Long term funding target (LTFT): Schemes are encouraged to set LTFTs with a clear plan on how to get there and investment and funding strategies aligned with this direction of travel.
- Scheme maturity: It’s important that schemes consider how their maturity fits alongside funding, investment and covenant considerations. For example, the more mature the scheme, the more amplified the level of downside risk is within a scheme’s investment strategy.
- Segmented actions: TPR has expanded the approach to segmenting schemes to set out what it expects of trustees and employers across covenant, investment and funding.
- A new approach: TPR continue to implement new ways of working to improve their effectiveness and increase standards. TPR are committed to intervening where schemes do not meet expectations and continue to proactively contact schemes where there are concerns. They have stated that valuation deadlines should not adversely drive decisions, although agreements should be reached as soon as possible.
When asking our audience which message will have the most impact, 62% agreed that the long term funding targets will.
Implications for trustees and sponsors
To create 5 segments, A to E, TPR uses 3 criteria: employer covenant, recovery plan length, and strength of funding target. A 4th criteria – maturity – creates a further layer of segmentation. TPR then sets out what’s expected from trustees and sponsors within each segment. Read more insights on these segments here.
Whilst not all schemes neatly fit into one of the segments set out in the AFS, the AFS helps in 3 key ways:
- This is the clearest statement yet in terms of setting out TPR’s expectations. Understanding these expectations avoids the risk that you might find yourself on the back foot;
- TPR has the benefit of seeing every valuation in the UK - the AFS helps to share that insight and experience; and
- Last year’s White Paper hinted at a much more directional funding code. In getting prepared for a ‘comply or explain’ regime, this year’s AFS is a good place to start.
Pension schemes with valuations this year will be under considerable pressure to pay higher contributions if they have a long recovery plan and/or are paying high levels of dividends relative to deficit contributions (referred to by TPR as ‘covenant leakage’). This will be an unwelcome challenge for those who are wrestling with tough trading conditions and Brexit-related uncertainty. If businesses are struggling, TPR will be increasingly likely to intervene to put the interests of members ahead of investors. A small number of higher risk schemes will also be subject to 1-to-1 supervision.
What should you do?
As a first step it’s important you understand which segment you fall into and what this means. You can get in touch with one of our consultants to help support you on this.
Over 70% of our audience can’t say for sure which segment they’re likely to be in.
For those who are already at the leading edge of best practice the changes are unlikely to cause a major stir. However, many schemes will have to ‘up their game’ to draw level, shifting their focus to how the scheme will be settled or run-off. All trustees and employers are, to some extent, going to have to work harder to demonstrate that a clear plan is in place and the risks they are running can be supported by the sponsoring business.
We’ll continue to provide more insight on the AFS and from our webinar. To read more on our analysis of the FTSE350, click here. Please also keep a look out for more information on the direction of travel for funding regulations – we’ll be sharing this over the coming weeks and months.