TPR has used the 2019 annual funding statement to reinforce its expectation that defined benefit pension scheme trustees and sponsors will draw together employer covenant, investment strategy and funding, against the backcloth of scheme maturity, to work collaboratively to produce coherent scheme funding plans that aim towards LTFTs.
Long-term funding targets
TPR wants schemes to “look ahead” and “set clear plans” in the form of LTFTs which look beyond being fully funded on a technical provisions (TP) basis, and reflects increasing scheme maturity, reducing dependence on employer covenant, and the ultimate long-term funding goal.
This is vital in an environment of massive uncertainties – such as the outcome of Brexit and the potential impact of climate change on employer business models. Time becomes a key variable in scheme funding decisions:
Time to scheme maturity
Time over which the sponsor covenant can be relied upon
Time over which investment returns can be delivered and downturns can be repaired – whether by market recoveries or further contributions
Time by which LTFTs can be met
Integrated risk management is the foundation for balancing risks
TPR’s emphasis on integration, collaboration and protection illustrates that covenant, investment and funding advice cannot be viewed as isolated “point solutions”: rather, they need to form part of a holistic view of the scheme, its maturity, its obligations, risks associated with it and the choices available to fund it.
The regulator uses a series of worked examples to demonstrate its expectations around integrated approaches to balancing key risks, again taking into account the funding level, maturity and covenant characteristics of a scheme.
This is a welcome further illustration of the necessity for schemes to adopt a coherent integrated funding approach, employing IRM to identify and manage material areas of potential off-plan performance.
Recovering the deficit
TPR also confirmed its expectation that scheme funding should not be compromised by excessive dividends; the position of the scheme as creditor must be respected and members appropriately protected. They will look for disparity between dividend payments and stable deficit reduction contributions (DRCs), and will be engaging with schemes where recovery plans appear excessively long given the characteristics of the scheme.
Integration and collaboration
To be consistent with TPR’s statement and other guidance, it is clear that Trustees and sponsoring employers need to focus on the interaction of scheme funding variables and uncertainties in an integrated way, building from a bedrock of understanding the sponsor covenant in detail – and working closely with investment, actuarial and legal advisers. If TPR considers appropriate consideration of these issues is not being undertaken by the Trustees and the sponsoring employers, then intervention should be expected.