Highlighting that “low dependency is not no dependency”, the AFS says that even a scheme with a low covenant reliance is exposed to relevant employer and scheme related risks that need monitoring. For example, TPR expects that trustees, even where funding levels are considered healthy, continue to assess the impact of the recent heightened trade and geopolitical uncertainty on their scheme’s investment strategy, employer covenant, journey plan and endgame strategy.
“The AFS confirms TPR’s move away from covenant ratings, instead focusing on the component elements of covenant, in particular, the cash flows of the sponsor.
“Following much industry discussion, TPR also clarified that it does not consider traditional Pension Protection Fund guarantees to be “look thorough” guarantees because they do not support the requirement to achieve low dependency by the relevant date. Schemes that are reliant on such guarantees may need to re-evaluate their journey plan or seek enhancements under the new Funding Code.
“Further clarity was provided on the measure of risk that trustees should be comparing to the level of risk that the sponsor can support. The downside event to be considered has to be, at a minimum, a 1-in-6 probability over the whole reliability period. The interaction between the reliability period, sponsor covenant and scheme risk will need careful consideration for more nuanced cases.
“It is also welcome news to hear that the DB endgame guidance and further information regarding the potential release of surplus is imminent in the coming weeks.”
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