TPR urges trustees to remain vigilant of sponsor activity

While considering that aggregate funding levels for tranche 16 schemes are “broadly unchanged” when compared with the past three years, the regulator acknowledged that schemes will have to consider their positions depending on their own unique circumstances.

In its latest annual funding statement, published on Wednesday, TPR noted the heightened uncertainty around certain key assumptions, such as mortality, where there is disagreement over whether the impact of “long Covid” in lowering future longevity improvements might be offset by future developments, such as vaccines and improved hygiene.

Given that, it said trustees can and should consider taking account of post-valuation experience at the date of signing their recovery plans.

Trustees must carefully consider the impact of the pandemic on the employer, but when it comes to longevity assumptions (which might reduce pension deficits) the regulator would prefer they ignore Covid-19

Mike Smedley, Isio

“Trustees can consider the impact on the scheme’s assets and liabilities of any significant changes in market conditions and the employer’s covenant since the effective date of the valuation. Post-valuation experience must take account of negative and positive events,” TPR stated.

It cautioned, however, that this should not be seen as “an opportunity to simply pick the most favourable date for agreeing the recovery plan”, stressing that trustees must have “credible justification” for the assumptions chosen, “and be content that the plan is appropriate and in members’ interests when the schedule of contributions is certified”. 

TPR also stressed the importance of continuing to monitor covenant strength closely, seeking independent specialist advice where necessary and especially if the covenant position is complex, the post-Covid outlook is unclear, lingering effects of Brexit remain significant, or where the scheme relies particularly heavily on the covenant.

Isio partner Mike Smedley said: “On Covid-19, TPR tells trustees to keep one eye open but the other firmly closed. Trustees must carefully consider the impact of the pandemic on the employer, but when it comes to longevity assumptions (which might reduce pension deficits) the regulator would prefer they ignore Covid-19.

“While it sounds hypocritical, of course this is the most prudent view and the regulator is doing its job to protect pension scheme members.”

He added that the bigger question is “whether the UK economy can afford to keep tightening the rules on pension funding”, or whether “recovery from the pandemic requires a looser and more flexible approach”.   

Trustees should be ‘ready to act’ on corporate activity

In light of the lingering effects of Covid-19, TPR acknowledged that there is a “general expectation” that the level of corporate activity will increase.

It cited a number of contributory factors, not least distressed employers needing to to be recapitalised through restructuring or asset sales, others going through insolvency proceedings, while those that have built up cash reserves might be looking to take advantage of investment opportunities.

The regulator made specific mention of the 130 per cent tax super-deduction on qualifying plant and machinery investment unveiled in the March budget, which it said could lead to employers asking trustees for different contribution structures in order to take advantage of the opportunity. 

When the measure was announced, Squire Patton Boggs partner Matthew Giles warned that this could leave DB schemes short-changed as employers look to divert money that might otherwise have been spent on a company scheme towards advantageous investment opportunities.

To mitigate this, TPR’s annual funding statement makes clear that any such request by employers should be handled in line with its Covid-19 guidance, and suggested that trustees might look to secure their scheme’s position by putting in place contingent assets for the period of any deficit repair contribution deferment.

“Trustees should be prepared and ready to act in the event of any corporate activity. They should be able to identify detrimental events that affect the employer’s ability to meet their obligations to the pension scheme, either on an ongoing basis or in the event of insolvency,” the statement read.

TPR said it will expect trustees to take a “rigorous approach” to assessing the impact of corporate transactions, and to negotiate mitigation where necessary to protect members and ensure the pension scheme is given fair treatment with respect to other creditors.

Aon partner Lynda Whitney told Pensions Expert that trustees “will need to think about their own specific circumstances”.

“TPR has provided some helpful areas to consider, such as the impact of Covid and Brexit, but we have found undertaking specific scenario planning is very helpful. The actual events won’t perfectly fit the scenarios, but it will allow thinking to have advanced so that action can be taken quickly in fast-moving corporate activity,” she said. 

DB funding code delayed further?

The regulator’s annual funding statement brought some confusion over the wording around the timeframe for the new DB funding code.

Its recently published corporate plan stated: “We expect our final revised DB code of practice to be in place by December 2022, with scheme valuations submitted to us under the new guidelines from the point at which the new code comes into force.”

However, in the document published on Wednesday, the regulator said it does not expect the new code to come into force until late 2022 “at the earliest”, leading some experts to suspect the code might be delayed further.

Whitney said the changed wording could constitute “a slightly further pushback”.

“They might manage to catch the key valuation dates in tranche 18 of December 21 2022 and March 31 2023, but at least the first of those is looking increasingly unlikely. There is still a risk it may not be implemented until tranche 19 valuations from September 2023,” she said.

Charles Cowling, chief actuary at Mercer, was of a similar mind. He told Pensions Expert that “there will be disappointment that the new funding code is delayed again”, as it “leaves a lot of uncertainty, in particular about the likely shape of the proposed new fast-track arrangements”.

“Trustees are being strongly encouraged to look forward and establish long-term plans for how they will deliver on paying the promised benefits. But many will say that they cannot do this until there is clarity on the funding code,” he stressed. 

“This would be a missed opportunity. It is very important that trustees are clear what their long-term plans are for settling members’ benefits in full, recognising the dual challenges of rapidly maturing pension schemes and uncertainty around the strength of the employer covenant (particularly over the longer term).

“Trustees then need to align their funding and investment strategies with these long-term plans and not focus simply on minimum regulatory compliance.”

A TPR spokesperson did not acknowledge the changing in wording, noting that the goal is still December 2022.