The Pensions Regulator has published its annual funding statement for 2019 which does broadly three things.
- It sets out the Regulator’s guidance for trustees and employers of defined benefit (DB) pension schemes on how to approach actuarial valuations with an effective date between 22 September 2018 and 21 September 2019.
- It outlines the Regulator’s current thinking on some of the most relevant issues currently facing DB pension schemes.
- It breaks down the universe of DB pension schemes into ten categories by reference to certain key characteristics and sets out specific examples of actions that the Regulator expects trustees and employers to take.
The statement is particularly relevant to those schemes with actuarial valuation dates between 22 September 2018 and 21 September 2019 but, in view of the wider comments made by the Regulator, it is something that all trustees and employers should review.
Long term funding targets
The Regulator notes that it has observed good practice among schemes which are setting clear plans for delivering their long term objective of paying the promised benefits to members.
In particular, the Regulator notes that this good practice typically leads to long term funding targets being agreed between trustees and employers and this is something that the Regulator now expects all schemes to do.
All trustees and employers will be required to set a long term funding target which is consistent with how they expect to deliver the scheme’s ultimate objective. They must then be prepared to evidence that their shorter term strategies are aligned with the long term funding target.
Integrated risk management
The statement reinforces the Regulator’s existing guidance to trustees and employers regarding the integrated approach that should be taken to managing the three main areas of risk (funding, investment and the employer covenant (strength)).
A number of factors are identified by the Regulator which will be taken into account when assessing a scheme’s overall risk profile. In particular, the Regulator is concerned with the length of recovery plans and the payment of dividends by employers:
- Recovery Plans. The Regulator’s data suggests that the median recovery plan length for schemes is seven years. It therefore believes that schemes with strong employer covenants should have recovery plans which are shorter than this. Where existing recovery plans are longer than the Regulator considers reasonable, the Regulator will engage with trustees before they commence their valuation to explain its expectations.
- A theme of regulatory statements in recent years has been the payment of dividends by employers. The Regulator expects employers not to increase dividend payments if their deficit repair contributions are not increasing. Broadly speaking, if dividends exceed deficit repair contributions then the Regulator expects trustees to set a strong funding target and for the resulting recovery plan to be relatively short. At the other end of the spectrum, if an employer is weak and unable to support the scheme, the Regulator expects no dividends to be paid.
Maturity
A new theme in this year’s statement is the focus on scheme maturity (ie the age profile of the scheme, and how close it is to the end of its lifespan). The Regulator notes that most schemes are now closed to new members and that this will result in scheme maturity issues assuming greater significance in future. When assessing risk and setting strategies in future, the Regulator will expect trustees and their actuaries to place greater importance on the maturity of the scheme when putting together their overall risk management strategy.
Specific examples
The statement sets out specific guidance to employers and trustees on the risks, on which they should be focusing, and the actions that are expected of them. Ten categories of scheme are illustrated, with the categories broken down by reference to the strength of the employer’s covenant, the funding position and the scheme’s maturity. All trustees and employers should review this part of the statement to identify their own circumstances because it provides the clearest guidance currently available of how the Regulator expects trustees and employers to behave with regard to integrated risk management.