UK: TPR's 2017 Funding Statement: A Shift In Approach?

The Pensions Regulator (TPR) has issued its Annual Funding Statement for defined benefit schemes (the Funding Statement). The Funding Statement identifies some of the key issues facing schemes with valuations in the period 22 September 2016 to 21 September 2017 (which it refers to as 2017 valuations).

The Funding Statement is aimed primarily at trustees and employers undertaking 2017 valuations, but it is relevant to trustees and employers of all defined benefit schemes, particularly the need to put in place a contingency plan. The Funding Statement is clearly influenced by TPR's experience on BHS: there appears to be a theme of putting greater pressure on employers to fund schemes more quickly.

Key points

1 Risk Management

Trustees need to monitor risks and take action when required regardless of a scheme's funding position. TPR expects trustees to take 'decisive action' where:

  • funding has been on a downward trajectory for more than one valuation; or
  • they have faced any significant adverse impacts.

2 Contingency plans

All trustees need to have a contingency plan in place detailing actions they would take to correct the scheme's position in the event of a downside risk materialising. This is particularly important for trustees who decide to continue to run significant risk levels.

3 Valuation assumptions

When setting valuation assumptions, trustees need to consider the extent to which changing market conditions affect the longer-term view of expected risk and returns, and how this interacts with the scheme's funding plans and risk appetite. Trustees need to have a sound rationale for the assumptions and to document clearly the reason for the choice.

4 TPR's approach

Trustees can expect TPR to be tougher and get more engaged earlier in funding negotiations. TPR wants valuations to be completed within the 15 months, so trustees need to start earlier with a clear timetable which moves quickly. TPR will take a tougher approach where schemes fail to submit their valuations on time.

5 Fair treatment between schemes and shareholders

TPR is going to focus on dividends to make sure pension schemes are being treated fairly in comparison to shareholders. They may investigate situations where dividends are greater than the pension contributions if recovery plans are not sufficiently short.

Who is the Funding Statement relevant to?

The Funding Statement is aimed primarily at trustees and employers undertaking valuations of defined benefit schemes with effective dates in the period 22 September 2016 to 21 September 2017. TPR refers to any such valuations as 2017 valuations. It also includes comments which are relevant to trustees and employers of all defined benefit schemes.

What does the Funding Statement mean for trustees and employers?

The Funding Statement sets out the points which trustees and employers should consider when carrying out 2017 valuations but it also includes points which are relevant to all trustees and employers.

Affordability and Managing Deficits

TPR has grouped defined benefit schemes based on their risk profile. Trustees should consider which category their scheme falls into and then take appropriate action. Where the employer is weak, TPR will not take into account the wider group covenant in its risk assessment where the scheme cannot rely upon it. Where there is no legally enforceable support, trustees should not rely upon the covenant of the wider group to justify agreeing to higher levels of risk in their valuation.

TPR specifically refers to stressed schemes. It recognises that the course of action that has the least detrimental impact on members' benefits of stressed schemes may be for the scheme to continue, even if doing so represents a potential cost to employers and the Pension Protection Fund (because scheme liabilities may continue to increase). 

TPR expects trustees of these schemes to reach the best possible funding outcome, taking into account members' best interests and the scheme's circumstances. Trustees in these circumstances must be able to show TPR that they have taken appropriate measures, for example, that the scheme has closed to future accrual and that they have sought to maximise security from the employer.

Valuation Assumptions

When setting the valuation assumptions, TPR expects trustees to consider the impact of changing market conditions on the longer-term view of anticipated risk and returns, and how this sits with the scheme's funding plans and risk appetite. Scenario planning should be considered.

Trustees are expected to seek and consider robust advice from their scheme actuary on the valuation assumptions. Whether or not trustees change the method used to set the discount rate, TPR expects trustees to have a sound rationale behind the change or decision not to switch and to document clearly why the method is or remains prudent.

Risk Management

Regardless of a scheme's funding position, trustees need to monitor risks and take action when required.  If the funding position is worse than expected, trustees should refer to and, where necessary, implement the scheme's contingency plan. They will also be expected to take action when agreeing the next recovery plan, for example by seeking to increase employer contributions.   

Importantly, if the scheme's funding position has been on a downward trajectory for more than one valuation or if they have faced any significant adverse impacts, TPR expects trustees to take decisive action. This marks an important shift - the days of simply extending the recovery plan are gone.

Trustees must be prepared for a downside risk occurring: trustees need to have a contingency plan in place setting out what steps they would need to take in order to correct the scheme's position. This plan needs to be agreed with the employer in advance and should be legally enforceable.

If the funding position is on track or better than expected TPR still expects trustees to be proactive and check that the scheme is on track to meet its long term funding objective and risk management plan.

Investment Strategy & the Employer Covenant

TPR will intervene and engage with schemes where it believes that the scheme's investment strategy is inappropriate. Trustees need to focus on the ability of the employer to contribute cash to the scheme while there remains good visibility of the covenant.

TPR's approach

We can expect to see a tougher approach from TPR. Trustees should be ready for:

  • a focus on proactive casework as TPR seeks to improve the way it identifies cases that present the biggest risks to members;
  • earlier intervention before recovery plans are submitted;
  • escalation of actions more quickly; and
  • use of the full range of TPR's powers to achieve the right outcome.

TPR is clearly keen to avoid another BHS scenario.

For 2017 valuation submissions, in particular, TPR will focus on fair treatment of schemes and late valuations. This is something which we would expect to see continue after 2017. So what will this mean in practice? 

Firstly TPR expects fair treatment between schemes and shareholders and is likely to intervene where it believes schemes are not being treated fairly. Alarm bells for TPR include extending the recovery plan end date where there is sufficient affordability to increase contributions to the scheme and prioritising payments to shareholders (where the employer covenant is constrained and so restricting or reducing the level of contributions to the scheme).

Trustees need to ensure that pension contributions are a key employer consideration. If an employer's total distribution to shareholders is higher than deficit reduction contributions then TPR will expect the scheme to have a relatively short recovery plan and that the recovery plan does not rely excessively on investment outperformance. Trustees and employers can expect investigations where this is not the case. If TPR believes that there is sufficient affordability to increase contributions it has said that it will take steps to ensure that an appropriate balance is struck by employers between the interests of the scheme and the shareholders..

Secondly, if schemes are having difficulties meeting the valuation deadline, they should engage with TPR and provide a clear timetable for completing the valuation, agreed by all parties. Enforcement action is more likely when delays could have been predicted, or where trustees have not engaged with TPR.

Smaller schemes

Smaller schemes are asked to reconsider all options, even if they previously thought an avenue was not open to them because of their size. TPR notes that the industry has moved on and developed products which are more efficient for smaller schemes. TPR will develop its approach towards smaller schemes so that the protection of scheme members of small schemes receives increased focus.

Next steps for trustees

  • Any scheme which is already working on a valuation should discuss the Funding Statement with its advisors immediately to ensure the above points are covered. Trustees starting work on 2017 valuations should ensure that the points outlined above are appropriately addressed.
  • Ensure the employer is familiar with the Funding Statement so that it understands the environment the trustee is operating in.
  • Use the Funding Statement to identify which category their scheme falls into and take appropriate action.
  • If funding has been on a downward trajectory for more than one valuation or if the scheme has faced any significant adverse impacts think about what decisive action can be taken.
  • If the scheme is in a worse funding position than anticipated, implement the contingency plans.
  • Challenge their advisors on the valuation assumptions.
  • Put in place a legally enforceable contingency plan for downside risks, an action plan for dealing with unexpected cash flow requirements, and document the consideration of the suitability of discount rate assumptions.
  • Only take into account legally enforceable recourse to wider group companies.
  • Understand the total level of payments to the employer's shareholders.
  • Engage with TPR early if trustees expect to miss valuation deadline.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
28 Jun 2017, Webinar, Dublin, Ireland

Is your business thinking of moving out of London post Brexit? Are you considering France, Germany or Ireland?

What are the challenges of hiring, firing and managing staff in cities such as Paris, Frankfurt and Dublin?

13 Jul 2017, Seminar, London, UK

This seminar will provide an update on the key developments in patent litigation in the UK in life sciences in the last 12 months including an in-depth look at the FKB v AbbVie litigation and what that means for the life sciences sector.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.