TPR consults on statement of strategy needed under the new funding and investment regulations

In this insight we summarise the key points from the Pensions Regulator’s 5 March 2024 consultation on the statement of strategy that trustees will be required to submit under the revised DB funding and investment regime.

Summary

On 5 March 2024, the Pensions Regulator (TPR) published a consultation pack on the statement of strategy (the Statement) that trustees will need to send to TPR under the revised defined benefit (DB) funding regime that is “designed to improve the security and sustainability of” schemes and which will apply to valuations with effective dates on and from 22 September 2024. The pack consists of:

• a consultation document;
• an example draft Statement template for a scheme with a Bespoke valuation – under the new regime, TPR will set a new twin-track compliance framework, Fast Track for schemes that adopt set parameters for a valuation and Bespoke for those which cannot or do not wish to use Fast Track;
• a worked example of how TPR expects maximum affordable contributions to be evidenced, where necessary; and
• a data list of the information that schemes will need to include in the template.

The consultation documents explain what information TPR is proposing to gather from trustees in the Statement which it is intended will be provided in template form. It is proposed that the information that will be required will differ depending upon scheme-specifics including whether a Fast Track or Bespoke approach is adopted. TPR seeks views from trustees and advisers on its proposals.

The consultation forms part of a group of documents that will govern the new DB funding regime including funding and investment regulations due to come into force on 6 April 2024: TPR’s revised DB funding code of practice, its consultation response on the Fast Track and Bespoke approach and a consultation on revised employer covenant guidance all three of which are expected to be published this summer.

After quite a lengthy lead-in time, the various pieces that will make up the new regime are finally falling into place although we will have to wait a little longer before full details will be available. Schemes (especially those with valuations around September 2024) may have a lot of work to do to ensure compliance within statutory deadlines and they should begin preparatory talks with their advisers and the employer if they have not done so already.

The consultation closes on 16 April 2024.

Overview of the new funding and investment regime

The Funding and Investment Strategy (the FIS)

DB schemes will need to have a FIS setting out how benefits will be provided in the long term, the scheme’s funding level and intended investment allocation at the date the scheme reaches significant maturity.

Significant maturity

By the time a scheme is significantly mature, it should have, at least, low dependency on the sponsoring employer – both in terms of funding and investment. Schemes will need a clear journey plan to show how they will reach this point.

The Statement

The Statement consists of two parts. Part 1 will contain the FIS and will require the employer’s agreement. Part 2 will contain various supplementary matters (including implementation success and the main risks of implementing the FIS). Part 2 only requires employer consultation, not agreement. The regulations provide that TPR will determine the form the Statement will take, and it has discretion as to the level of detail required on Part 2 supplementary matters.

The Statement must be signed by the chair of trustees.

TPs, the recovery plan and employer affordability

A scheme’s technical provisions (TPs) will have to be calculated ‘consistent with’ the FIS. When assessing recovery plan appropriateness, trustees will have to follow a new principle that the recovery period “must be as soon as the employer can reasonably afford”.

Employer covenant strength

How much risk can be taken during a scheme’s journey plan depends on employer covenant strength. For the first time, schemes will need to provide covenant information to TPR when sending in their valuations.

Interaction of statement with other funding information provided to TPR

All schemes: will need to send TPR their valuation (not just schemes with a recovery plan like now) and a Statement.

Schemes with a deficit: must also submit the recovery plan and schedule of contributions but will no longer need to send in an information summary.

Avoiding duplication: where possible, TPR will try to avoid schemes having to provide information in duplicate forms, for example, certain Statement information is already provided on the scheme return and through the valuation.

The proposed statement template

TPR is proposing that the Statement should be standardised and in the form of a set template which it believes will reduce both the burden on trustees and costs, avoid consistency and quality issues and compliance risk, and will allow TPR to provide more “targeted, effective and efficient regulation”.

Four versions

TPR proposes having four versions of the template.

Versions 1 and 2: for Fast Track valuations before/ after ‘relevant date’ (date scheme reaches significant maturity).

Versions 3 and 4: for Bespoke valuations before/ after relevant date.

Proportionate approach to the template

As part of its focus on improving how it collects and assesses data, TPR has made the Statement template proportionate so more in-depth information will be required for Bespoke valuations (see below) and adjustments are going to be made for smaller schemes based on two definitions (those with fewer than 100 members for the provision of actuarial information and schemes with less than £30m in section 179 liabilities for investment information based on how schemes treat themselves for scheme return purposes).

Differences between Fast Track and Bespoke

More information will be needed for a Bespoke Statement – the exact detail required will depend on risk taken. Although many Bespoke valuations will not require further TPR engagement, there will be cases when further consideration or engagement will of course be needed. TPR expects the Statement to show:

• that funding and investment risk is supported by the employer covenant and aligns with scheme maturity;
• the recovery plan satisfies the new statutory principle that the deficit “must be recovered as soon as the employer can reasonably afford”; and
• that the long-term strategy is appropriate and complies with legislation.

Although less information will be needed for a Fast Track Statement because meeting Fast Track means satisfying TPR’s views on ‘tolerated risk’, this does not mean Fast Track is devoid of risk nor will it be appropriate for all schemes. TPR will carry out a ‘high-level’ review and following this does not see there being a need for much further engagement. The proposal is that the Fast Track template will:

• not need commentary on the appropriateness of the FIS;
• not require details on investment risk in the journey plan;
• ask for less detail on assessment of investment risk and employer covenant.

Actuary role – any confirmation from the actuary that a scheme satisfies Fast Track will not be a judgement as to the appropriateness of the approach.

Differences between pre-relevant and post-relevant date templates

The differences here will reflect that a scheme which has reached significant maturity will not need a journey plan and should be fully funded on a low dependency funding basis.

Open schemes

The information required on the Statement will hinge on whether the valuation is Fast Track or Bespoke. Schemes will also need to provide further detail on accrual allowances, salary increases and active member cashflow.

Information which the TPR intends to collect

The consultation sets out what information TPR is proposing to collect in respect of both parts of the Statement including covenant. For each item of information, TPR provides further detail of exactly what will be required, whether the requirement applies to all schemes, Bespoke or Fast Track and then sets out its considerations which provide relevant commentary and explanation.

Part 1 of the Statement: the FIS

The consultation covers the statutory requirements for the FIS and the information needed both from a statutory and TPR perspective.

Information will need to be provided on the following items: the scheme’s long-term objective; its long-term funding and investment strategies; current funding position; the journey plan; discount rates; yield information; and information on other key assumptions (financial and demographic).

Part 2 of the Statement: Supplementary matters

Required within Part 2 of the Statement will be the following items: whether the trustees believe the FIS is being successfully implemented and associated risks (including risk mitigation and reflections on significant past decisions); actuarial information including a summary of the valuation and recovery plan if appropriate, and an estimate of scheme maturity; and information on schemes’ ‘notional strategic investments’ including on the investment strategy, current risk levels, current strategic asset allocation, liquidity, and for Bespoke schemes hedging and risk levels on the journey plan.

Employer covenant (a Part 2 supplementary matter)

Under the regulations, the Part 2 supplementary matters include an assessment of the strength of the employer covenant and how long it is reasonable to rely on this assessment. This is the first time that trustees will have to submit covenant information with the valuation.

At present, covenant assessments tend to use a scale rating system going from 1 (strong) to 4 (weak). Under the revised funding regime more detail will need to be provided to TPR on the assessment with the exact level of detail dependent upon the degree to which the covenant is relied upon to support risk levels. TPR believes that most of the information that it wishes to request will be readily available.

The revised DB code will set out TPR’s expectations as to how trustees should assess covenant and its forthcoming revised covenant guidance will also provide further assistance.

The proposal is that the Statement will ask for information on: whether the assessment was carried out by reference to maximum affordable contributions (and, if applicable, contingent assets) and if it can support risk levels; the employers including if the assessment takes into account other entities providing legal support; for bespoke schemes employer cashflow, employer liquidity and reasonable alternative uses of cash; contingent assets; and the trustees’ view on reliability and longevity periods.

Comments

We now have another piece of the jigsaw that makes up the revised DB funding framework and detail on exactly what will be expected of trustees so far as the Statement is concerned. The consultation emphasises TPR’s focus on improving how it collects and assesses data and it appears from the consultation that schemes especially those on the Bespoke ‘pathway’ will have to provide quite a lot of detail so schemes will need to start their preparatory work well in advance of the deadlines. There will also be associated additional costs involved especially in the implementation phase, but these should settle down once the new regime is sufficiently embedded, and schemes move to a ‘business as usual’ phase.