Laura McLaren, Head of DB Scheme Actuary Services, Hymans Robertson, said: “With schemes tackling their first valuations under the new funding regime, it’s not a surprise to see this year’s statement from The Pensions Regulator (TPR) speaking in large part to those new requirements. DB endgames, surplus sharing and market volatility all get notable airtime too. On the Funding Code, there is little in this year’s statement by way of additional technical guidance, but there are some helpful clarifications addressing areas such as covenant, supportable risk and what ‘proportionality’ looks like as schemes wrestle with putting the theory into practice. TPR also confirm the new ‘Submit a scheme valuation’ digital service will launch soon – the final piece of the puzzle for collecting scheme data and plans. Detail on how TPR will assess submissions remains fairly scant, though they state they will be ‘risk-based and outcome focused’ when deciding which schemes to interact further with and less likely to engage with schemes going Fast Track. Nevertheless, until clearer market practice develops, keeping compliance proportionate remains a tricky balancing act, especially with schemes becoming increasingly well-funded. The statement highlights that trustees should not underestimate the time needed to meet the Code’s additional compliance requirements given all the new elements introduced. Early planning, working collaboratively with the employer and bringing actuarial, covenant and investment advisers together, are all key steps that will help to smoothly integrate the new regulations. Beyond the immediate requirements of the new Funding Code, TPR also go further in discussing the growing interest in DB surpluses than we’ve seen in previous statements. Although more specifics on DB surplus and the government’s plans to legislate will come as part of the upcoming Pensions Bill, it is encouraging that TPR are committing to publishing more DB endgame guidance in the coming weeks. This continues to underscore the growing policy focus and intent in this area. TPR estimate just over half of schemes are now in surplus on a buy-out basis and 76% against a low dependency measure. The steer from TPR for trustees to plan ahead, robustly considering their endgame and policies for any release of surplus in the context of their individual scheme, including how they would approach any employer request, is particularly helpful. With regulatory reform looking set to meaningfully increase the potential flexibility around surplus, starting to explore scheme-specific circumstances and objectives will be time well spent. This endgame planning will be most effective where trustees and sponsors work together. Ultimately, after a transformative few years within the DB landscape, trustees and sponsors should be grasping the opportunity to pause, take stock and review plans. Not only to ensure that they’re robustly meeting the compliance requirements of the Funding Code but also maximising the opportunity to improve long-term outcomes.”
Mark Tinsley, Principal at Barnett Waddingham comments: “This year’s statement is notably bland, especially given the prevailing economic and geopolitical uncertainty. In previous years, similar levels of uncertainty might have prompted far more extensive guidance. That such a restrained approach has been taken this time speaks volumes about the current healthy funding landscape, with the Regulator estimating that over half of schemes can afford to buyout. The statement rightly includes a brief reference to the evolving issue of pension scheme surpluses and surplus extraction. Encouraging trustees to proactively engage with these matters is a good suggestion, ensuring that all potential opportunities are carefully considered before locking a scheme into a risk transfer arrangement. On the topic of the new funding regime, schemes currently undertaking or preparing for valuations will welcome the reassurance that Fast Track parameters will remain unchanged. However, by maintaining the parameters in the current unusual market conditions, there is a risk of the Regulator backing itself into a corner for future assessments. The detailed technical clarifications on covenant considerations provide useful guidance. However, the complexity and volume of the guidance illustrates the stark juxtaposition of the new regime—at a time when three out of four schemes are fully funded on a low dependency basis, paradoxically, the burden on trustees and sponsors has never been heavier.”
Jon Forsyth, Chair of the SPP DB Committee, responded: Given the healthy funding positions reported in this year’s AFS – with just over half of schemes estimated to be in surplus on a buyout basis, and more than three quarters in surplus on a low dependency basis – it makes sense for TPR to place a greater emphasis on endgame planning. But TPR is also right to highlight global economic uncertainties and the risks they could pose. With this being the first AFS under the new funding regime, TPR has used the rest of the Statement to make some further clarifications to its expectations in a number of areas, including in relation to the long term objective, covenant assessment and monitoring, and the new “supportable risk” test. Overall the AFS doesn’t contain many surprises, but that will likely be good news for the first schemes working their way through the new valuation process.”
TPR publish first AFS under the new DB funding code
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