The Pension Regulator’s (TPR’s) Annual Funding Statement for 2019 was published on 5 March.
The Statement emphasises, using a series of worked examples, the need for integration in the funding of schemes, drawing together the dimensions of employer covenant, investment strategy and funding set against the backcloth of scheme maturity. The Statement also brings out the need for Trustees and employers to work collaboratively in formulating coherent scheme funding plans aiming towards Long Term Funding Targets. TPR confirmed their expectation that scheme funding should not to be compromised by excessive dividends: the position of the scheme as creditor must be respected and members appropriately protected.
TPR’s emphasis on integration, collaboration and protection illustrates that covenant, investment and funding advice cannot each be looked at as isolated “point solutions”: rather, they need to form part of a holistic view of the scheme, its maturity, its obligations, risks associated with it and the choices available to fund it.
Paul Brice, Head of Pensions Advisory at Grant Thornton said:
“TPR’s Statement is a welcome further illustration of the necessity for schemes to adopt a coherent Integrated Funding approach, employing Integrated Risk Management to identify and manage material areas of potential off-plan performance."
In our view, “Looking ahead” and setting clear plans are vital: in an environment of massive uncertainties – such as the outcome of Brexit and the potential impact of climate change on employer business models – time becomes a key variable in scheme funding decisions: time to scheme maturity; the time over which the sponsor covenant can be relied upon; the time over which investment returns can be delivered and downturns can be repaired – whether by market recoveries or further contributions; and the time by which Long Term Funding Targets can be met.
To be consistent with TPR’s Statement and other guidance, it is clear that Trustees and sponsoring employers need to focus on the interaction of scheme funding variables and uncertainties in an integrated way, building from a bedrock of understanding the sponsor covenant in detail – and working closely with investment, actuarial and legal advisers. If TPR considers appropriate consideration of these issues is not being undertaken by the Trustees and the sponsoring employers then intervention should be expected.”
Should you wish to discuss any of these issues further, please contact:
Paul BriceHead of Pensions AdvisoryT +44 (0)20 7728 3423M +44 (0)780 297 8546E firstname.lastname@example.org
Neil KnightsHead of UK PensionsT +44 (0)207 865 2873M +44 (0)779 403 0990E email@example.com
“Paying the promised benefits is the key objective for all schemes. This requires schemes to look ahead and set clear plans for how the objective will be delivered. Good practice we have observed among schemes who appear to do this well often involves trustees and employers agreeing a clear strategy for achieving their long-term goal, which recognises how the balance between investment risk, contributions and covenant support may change over time as the scheme gets better funded and more mature.” TPR's Annual Funding Statement 2019, p5