Well-funded defined benefit (DB) schemes have a range of options including targeting surplus generation, consolidation or buy-out with an insurance company, TPR's annual funding statement (AFS) published today sets out.
Half of schemes are expected to have exceeded their estimated buy-out funding levels and their trustees and employers have the opportunity to reassess their long-term objectives.
TPR’s Interim Director of Regulatory Analysis and Advice, Louise Davey, said: “Where funding levels have improved significantly, trustees should review objectives and strategies, set during a period of low interest rates, to ensure they remain in the best interests of members. If they are not, trustees should look to redirect some of their funding level improvements towards a funding and investment strategy that is aligned with their plans for the scheme.
“Options range from moving to a long-term target with the potential to generate additional surplus, to entering a consolidator or insurance arrangement.”
Around a quarter of schemes are expected to remain in deficit on a technical provision basis. Trustees of such schemes need to focus on achieving a recovery plan that is as short as reasonable, based on the employer’s affordability. They also need to be very mindful of the employer covenant, given their higher reliance on it.
Discretionary increases
TPR recognises that with schemes experiencing better funding, trustees face a range of calls for how that funding could be put to its best use. For example, some employers are asking to reduce or suspend contributions, and members are requesting discretionary increases. When considering these requests, trustees should be mindful of their overall position, the resilience of their investment strategy and level of covenant support.
With discretionary increases, trustees should also consider the situation of members who would benefit from a discretionary increase, and whether their scheme has a history of making such awards.
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