Clearer, quicker and tougher: tPR’s approach to DB Schemes outlined in its Annual Funding Statement

On 5 March 2019, the Pensions Regulator (tPR) published its Annual Funding Statement for defined benefit schemes. The statement sets out the key expectations tPR will have for trustees and employers, and signals a clear nod to becoming a tougher regulator, as outlined in the Government’s White Paper, published in March last year. 

tPR’s statement identifies their strategic plan and is particularly relevant for those schemes approaching valuation, focusing on:

• reducing the length of recovery plans
• setting long-term funding targets
• ensuring a fair approach to schemes relative to that of shareholders

tPR’s approach to forthcoming scheme valuations

tPR has outlined its upcoming targets for those schemes that are preparing its valuations between 22 September 2018 and 21 September 2019, as well as schemes reviewing funding and risk strategies.

1. Shorter recovery plans
tPR has indicated it will be taking a proactive approach to identifying recovery plans it considers unacceptably long. It notes the median recovery plan to be seven years and suggests that it expects schemes with strong covenants to be significantly shorter than this.

tPR proposes to consider the maturity of schemes and the financial strength of the sponsor in considering the appropriateness of a scheme’s recovery period.

2. Long-term funding targets
tPR has signalled a clear focus on managing long-term risk. tPR will now expect schemes to identify a long-term funding target in readiness for the Government’s intention for schemes to have clear final destinations.

In order to create the target, sponsors will need to consider investment risk, contributions and covenant support as the scheme matures. tPR will expect schemes to increase their technical provisions to enable them to meet this target.

3. Equitable treatment
In the wake of the high profile corporate failures and large dividends, tPR has expressed continued concern about the disparity between dividends and deficit repair contributions. tPR has clearly outlined its expectations:

• For financially weaker employers, deficit repair contributions should be larger than shareholder distributions, unless the recovery plan is short and the funding target is strong
• If the employer is particularly weak and unable to support the scheme, the payment of shareholder distributions should have ceased

Sponsors should consider their approach to dividends in light of this.

What next?

As part of this initiative, tPR has confirmed that it is set to consult on a new DB funding code this summer. It is expected that the new code will follow a similar theme; focusing on improving trustees’ long-term planning.

tPR reminds readers of the uncertainty within the present economic market, which causes difficultly in long-term planning. It has left the door open to the possibility of further guidance in the event of market instability caused by Brexit.