The Pensions Regulator has published its annual funding statement for defined benefit pension schemes. The statement is aimed particularly at schemes with effective actuarial valuation dates between 22 September 2017 and 21 September 2018, but the key messages are also intended to be relevant to other schemes. 

Some of the key messages are:

  • balancing risks: the Regulator continues to expect trustees to focus on the integrated management of three broad areas of risk: employer covenant, investment risks and scheme funding plans. In addition, the Regulator also expects trustees to take into account risks that arise from scheme maturity;
  • dividends and "covenant leakage": the Regulator is concerned about what it perceives to be a growing disparity between dividend growth and stable deficit reduction payments (as highlighted by recent corporate failures). The Regulator expects trustees to negotiate a short recovery plan if the employer is strong but dividends and other forms of "covenant leakage" (e.g. via intra-group loans) are disproportionate to deficit recovery contributions. Where the employer covenant is weak, the Regulator expects scheme liabilities to be prioritised over shareholder returns;
  • contingency planning: effective risk management needs documented and workable contingency plans, and where possible these should include legally enforceable rights of recourse e.g. against secured assets;
  • Brexit uncertainty: the Regulator expects trustees to discuss the outlook for the economy as a whole, and their particular sector, with their sponsors with a view to agreeing on the risks which need addressing. Where sponsors are reasonably holding back cash by extending the recovery plan because of Brexit uncertainty, trustees should make sure that shareholders are also "sharing the burden proportionately";
  • transfer activity: trustees who are considering whether to make an allowance in their valuation for an increased level of transfer activity in future should consider their scheme's experience and likely trends very carefully before doing so. If an allowance reduces technical provisions, the Regulator expects trustees to quantify the effect in advance and continue to monitor it, with a contingency plan in place should the assumption not be borne out. In addition, the Regulator asks trustees to keep records of transfer activity, including details of the advisers and the schemes to which transfers are made and to contact the Regulator or the FCA if they have concerns about the volume of transfer activity or the quality of advice members to members regarding transfers. The Regulator expects trustees to monitor transfer activity closely and take advice on liquidity management.  This is particularly relevant to smaller schemes where members with very large transfer values could have a disproportionate effect;
  • what to expect from the Regulator: the Regulator believes it is now being clearer on its expectations, quicker to act and tougher on those who fail to act in the interests of members. It has taken on more cases and is extending its proactive approach to scheme engagement to include smaller schemes. The Regulator expects trustees to start their valuation process in good time and make every effort to agree it within the statutory deadline. Trustees should not agree an inappropriate valuation and funding plan merely because the deadline is imminent or has been missed and should contact the Regulator if they are pushed to do so.  The Regulator says it has several investigations underway where it might use its power to direct how technical provisions should be calculated or how a scheme's deficit should be funded.

Key contacts

Rachel Rawnsley

Rachel Rawnsley

Partner, Head of Pensions
United Kingdom

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Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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Catherine McAllister

Catherine McAllister

Partner, Pensions
United Kingdom

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Rachel Uttley

Rachel Uttley

Partner, Pensions
United Kingdom

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