Regulator turns focus to DB sponsors’ long-term plans

The watchdog’s annual funding statement encourages schemes to set out a journey plan to an end goal, such as buyout, self-sufficiency or superfund transfer, while cracking down further on long recovery plans and excessive dividend payments by companies with a DB scheme.

Some 41 per cent of Britain’s DB plans are now closed to future accrual, according to the Pension Protection Fund, and regulation surrounding final salary plans is becoming increasingly prescriptive as the funds mature.

Making the recovery time frame shorter is good because it focuses the mind on actually getting the job done and getting the money in to pay the pensions

Andrew Parker, Law Debenture

The funding statement instructs trustees of mature schemes to ensure they are not at risk if increased payments out to pensioners and transferring deferred members coincide with other outflows such as investment losses.

It also asks all trustees to check that their investment strategies are consistent with the scheme’s long-term target, and check that the sponsor can make up any shortfall from poor performance. Employers, meanwhile, are encouraged to explore contingent funding to mitigate the risk of trapped surplus.

Planning can benefit both sides

Andrew Ward, partner and head of risk transfer at Mercer, welcomed the guidance, which outlines what he said is already accepted practice at well-run schemes.

“Everyone should really be thinking about a longer-term target, whatever that might be,” he said. “It’s not rocket science – how can you make decisions on funding and investment without knowing where you want to end up?

“The challenge will be that situations differ, and a good dialogue between the employer and trustees in relation to the scheme specifics will be important,” he continued, adding that stakeholders should keep plans flexible to adapt to changes in circumstances.

At present, the funding statement offers guidance around TPR’s thinking, rather than forcing employers to fund to a new, higher-liability value. The publication of a new DB funding regime could further codify these expectations.

“This is probably a hint of something to come in relation to the new DB funding code, of which we expect a draft later in the year,” said Dickon Best, director at PwC. However, he distinguished between employers being required to pump in more cash today and having a clear plan for how to achieve their aim.

He said that covenant assessment will become even more important for trustees under the framework, as it will be important to know whether sponsors have the longevity to fulfil their long-term plans. Equally, frank conversation may help trustees secure more cash today.

“If you’re clear on what you’re trying to achieve, and… if businesses can see that endgame, then more capital may be available to support the scheme,” Mr Best said.

Shareholder-scheme balance shifts

The regulator also used its funding statement to maintain its pressure on companies that pay out excessive dividends.

Where dividends and other payouts to shareholders exceed the value of deficit repair contributions, the regulator will now insist that a strong funding target has been set with a relatively short recovery plan.

“If the employer is tending to weak or weak, we expect DRCs to be larger than shareholder distributions unless the recovery plan is short and the funding target is strong,” the statement added. If weak employers have ceased their payments to the scheme for reasons of affordability, dividend payments should also have stopped.

The focus on dividends is accompanied by increasing scrutiny on the length of recovery plans.

Recovery plans to shrink further

Where high-profile sponsors had planned to pay off their debts over 20 years as recently as 2016, the median plan length is now seven years.

TPR is turning up the heat a stage further. “We take the view that the schemes with strong covenants should generally have recovery plan lengths that are significantly shorter than this,” the statement said.

“Making the recovery time frame shorter is good because it focuses the mind on actually getting the job done and getting the money in to pay the pensions,” said Andrew Parker, director at Law Debenture Pension Trustees.

Mr Parker welcomed the statement, although he said schemes should already be doing this and added that negotiations on long-term plans need not be a conflict between trustee and sponsor.

“If they can get this off their books and the trustees can have enough money… then that’s a win-win,” he said.