Pensions Expert explores the latest Annual Funding Statement and gauges the industry reaction as attention turns to surplus release regulations, ahead of new rules expected next year.
Pension schemes must be alert to market volatility and geopolitical risks as they decide upon their endgame strategies, the Pensions Regulator (TPR) has warned.
The regulator this week published its latest Annual Funding Statement, which reported that six in 10 defined benefit (DB) pension schemes are in surplus on a buyout basis.
This rose to 80% of schemes when measured on a low dependency basis, and 90% on a technical provisions basis.
“Run-on, superfund consolidation, buyout – whichever route you’re considering, the decisions you make now will shape members’ futures.”
Ben Gunnee, The Pensions Regulator
Ben Gunnee, TPR’s executive director of market oversight, said: “DB funding has changed dramatically, and it’s prompting trustees and employers to rethink their endgame. Run-on, superfund consolidation, buyout – whichever route you’re considering, the decisions you make now will shape members’ futures.
“The environment is shifting, and staying still won’t keep you ahead. We expect trustees to maintain their focus on long-term planning and ensure their scheme has a clear and well-evidenced endgame strategy.”
TPR urged trustees to ensure they understand the risks to investment strategies and employer covenants, “particularly as schemes move closer to their long-term objectives”.
Forthcoming guidance ‘essential’, industry says
With the Pension Schemes Act setting the ball rolling on powers for trustees to release surplus, TPR will soon publish more information on its approach to surplus release ahead of final regulations that are expected next year. However, the regulator is encouraging trustees to start work on endgame and surplus policies as soon as possible, if this has not yet begun.
Laura McLaren, head of DB scheme actuary at Hymans Robertson, said: “The focus now shifts to implementation, and it’s positive that TPR will publish further guidance in the coming months, including some early views on surplus use ahead of more detailed regulations.
“Getting this important guidance right will be essential to ensure schemes, trustees and employers can engage confidently while protecting member outcomes.”
Jon Forsyth, chair of the DB committee at the Society of Pension Professionals (SPP), agreed that regulatory clarity on endgame options was “essential”.
He said: “Trustees will need to balance new opportunities with appropriate safeguards, ensuring that any decisions taken are aligned with member interests while reflecting the evolving legislative and regulatory landscape.”
Stewart Hastie, chair of the Association of Consulting Actuaries (ACA), added: “Getting the secondary legislation and regulator guidance just right is critical to supporting trustees and sponsors in taking an approach that reflects the varied characteristics and history specific to their own scheme and associated employer or sponsor.
“In what can be an emotive subject, it will be important to use appropriate terminology and language to support the right behaviours, recognising that the requirement for solvent employers to fund DB schemes prudently meant that DB schemes were always expected to end up in surplus at some point.”
Running on and funding levels
Richard Soldan, partner and head of LCP’s DB Funding Group, argued that most schemes should review their surplus policy regardless of whether or not they are actively considering running on.
“The way in which a potential surplus might be used could influence the endgame that trustees wish to pursue,” Soldan said. “If an employer says it will not consent to any additional benefits to members, for example, trustees may be less likely to run a scheme on into the future.
“TPR is right to be clear that [surplus] discussions should not be deferred while the industry waits for further regulation or guidance.”
Mark Tinsley, Barnett Waddingham
“And schemes that are targeting risk transfer should certainly be considering this too – especially those that already have a surplus on a buyout measure.”
Mark Tinsley, principal at Barnett Waddingham, said the regulator’s focus on endgame planning was “encouraging”. “TPR is also right to be clear that these discussions should not be deferred while the industry waits for further regulation or guidance,” he added. “This is work that needs to be happening now.”
However, Tinsley warned that endgame planning could “remain more of a compliance exercise than a strategic tool for many schemes” as many employers were “reluctant” to say publicly that they were aiming for buyout “due to concerns about unintended consequences”.
Emerging surplus rules
The ACA’s Hastie highlighted nuances in the funding level data reported in the Annual Funding Statement. TPR reported that around 60% of DB pension schemes were above 110% funded on a low dependency basis, while 20% had a funding ratio between 100% and 110%.
Hastie said this data potentially gave “some indication of how [TPR] might approach the DB surplus guidance expected towards the end of this year”.
Tom Froggett, partner and head of DB run-on at XPS Group, pointed out that TPR’s focus on low dependency was consistent with the expected regulations around surplus release. The Pension Schemes Act has set a top-level framework for releasing surplus, and full funding on a low-dependency basis is expected to be the lower limit, although this is subject to further legislation.
Froggett said: “In practice, however, we are increasingly seeing trustees and employers explore a ‘run-on like an insurer’ approach, maintaining higher funding buffers to deliver greater certainty and stability over future surplus generation and release.”
Jacob Shah, investment partner at LCP, called for the regulator to review the strategy expectations for schemes funded just above low dependency. TPR’s current approach indicates that these schemes “may typically take limited investment risk”, but Shah argued that if they were aiming to run on, schemes would be unlikely to de-risk at this level.
“In any event, the level of risk taken would be highly dependent on the covenant and other circumstances of the scheme,” said Shah.
Valuations becoming a ‘strategic tool’
Elsewhere in the Annual Funding Statement, TPR highlighted that an increasing number of schemes were using their triennial valuations as a “strategic tool” when developing or refining their endgame strategies.
Hymans Robertson’s McLaren said valuations were “an opportunity to refine long-term plans and assess progress”, but added that schemes should be reviewing and strengthening their strategies “whether or not a valuation is currently underway”.
The regulator estimates that around 80% of DB pension schemes should be able to meet the “Fast Track” approach for sign-off of valuations under its new DB funding regime. This path will mean less regulatory engagement and reporting requirements in most cases, TPR said.
LCP’s Soldan said the regulator’s plan to review parameters around the Fast Track path indicates that “it plans to set the Fast Track bar higher for less mature schemes”.
He added: “We would urge TPR to consider this carefully and consult with industry, as our recent experience of strong pricing in the insurance market indicates that the current Fast Track requirements for technical provisions and low dependency could already be close to buyout levels in some cases, especially for more mature schemes.”
