Actuarial valuations in 2018 – the three key points to consider

The Pensions Regulator has committed in recent years to becoming clearer and more direct in the way it regulates. It aims to do this both in the way that it engages with trustees and employers, and in the resources that it shares. The recently published annual funding statement for 2018 continues this trend.

The main purpose of the statement is to set out the way that the Regulator will deal with actuarial valuations which have an effective date between September 2017 and September 2018, but the themes that emerge will be of much wider relevance for trustees and employers.

The clarity that the Regulator is aiming for in its communications is evidenced in the summary document that accompanies the statement and is designed as a reference point to be used in meetings by trustees and employers. This highlights three important messages:

1. Affordability and managing deficits
2. Fair treatment
3. Risk management and contingency plans

Affordability and managing deficits

The Regulator continues to urge trustees to focus on integrating their assessment of the three key risk areas (employer covenant, investment and scheme funding).

In particular, the Regulator sets very clear expectations for trustees when considering the affordability of contributions and the management of the scheme’s deficit, all of which are underpinned by an assessment of the characteristics of the employer and the scheme.

As an example, trustees are encouraged to consider strengthening technical provisions, increasing contributions or reducing recovery plans for schemes with strong employers who are on track to meet a long term funding objective. At the other end of the spectrum, the Regulator provides a number of examples of what it expects to see from trustees who are faced with a long recovery plan and a weak employer with limited affordability. In summary, these trustees are encouraged to demonstrate that the scheme’s liabilities are being prioritised over shareholder returns and that support for the scheme is maximised.

Fair treatment

The guidance around prioritising scheme liabilities over shareholder returns is the most striking theme to emerge from the annual funding statement. An entire section of the statement is set aside to explain the Regulator’s concern with the “growing disparity between dividend growth and stable deficit reduction payments”.

Trustees are expected to negotiate robustly with employers to secure a fair deal for the pension scheme and it is clear from the statement that the payment of dividends by employers will be an area of focus when the Regulator is reviewing this year’s actuarial valuations. Trustees and employers should therefore focus on assessing the relative levels of dividend payments and deficit repair contributions during their valuation discussions. If dividends are disproportionate relative to deficit repair contributions then trustees and employers should consider revising their recovery plans to redress that imbalance.

Risk management and contingency plans

The key message from the Regulator in this section of its statement is that it will not accept scheme size as an excuse for trustees failing to assess risk and put in place contingency plans.

This has historically been a tricky area for trustees and employers of smaller schemes because they are often constrained by the resources and budgets that are available to them. In many cases this has resulted in trustees diligently dealing with issues as they arise but lacking the support systems to manage those issues more proactively.

It is right for the Regulator to focus on this as an area for improvement and the guidance that has been produced is helpful. With appropriate support from their advisers and with guidance from professional trustees, it is possible for all schemes (regardless of size) to monitor the risks to which they are exposed and to ensure that plans are in place so that they know how they will deal with problems that do materialise.

Summary

In summary, trustees and employers should be prepared for more intervention from the Regulator as they work through actuarial valuations over the next twelve months. However, the key themes that the Regulator has identified are reasonable and logical. It should therefore be possible to avoid any difficult conversations at the end of the process by proactively considering these points and devising funding strategies that take account them into account.