Industry reacts to TPR's 'call to action' on climate and risk

The Pensions Regulator (TPR) has given trustees a “strong call to action” on climate change in its Annual Funding Statement, although some in the industry were concerned about its increased size and scope.

TPR’s annual funding statement urged trustees to consider factors such as climate change and long-term funding targets in integrated risk management frameworks, while also outlining what the regulator expected from trustees and employers.

Mercer chief actuary, Charles Cowling, said: “The statement gives trustees a clear and strong call to action. On climate change, they will need to take action to consider and mitigate for climate change risks. On covenant risks, TPR is placing more pressure on trustees to consider taking independent advice and actively monitor covenant risks.

“TPR is also clear that it expects trustees to establish long term objectives and document their plans to meet those objectives, even before the introduction of the new funding code – now not expected before the end of next year.

“As required by law, TPR is also building on its integrated risk management guidance to trustees to include a new requirement for regular 'own risk assessments', encouraging trustees to begin work on these now.”

The broad range of topics and responsibilities referenced in the statement led some to express concern, with Association of Consulting Actuaries chair, Patrick Bloomfield, asking if “a reality check on the industry’s bandwidth is overdue”.

He commented: “This year’s list of topics covers climate change, Brexit, post-Covid longevity, corporate transactions, inflation and investment benchmark changes; plus TPR’s own funding code consultation and the all new ‘own risk assessment’ requirements. Mercifully GMP equalisation doesn’t get a mention, nor do the cyber and scam actions being asked for.”

Aon head of retirement policy, Matthew Arends, voiced similar concerns, noting: “This year’s Annual Funding Statement goes well beyond issues only relevant to schemes with valuations this year. It has ballooned by 40 per cent from about 3,300 words in 2020 to about 5,500 words in 2021 and the topics covered are a smorgasbord including climate change, liquidity, and distressed sponsors.

“A better title might be Annual DB Regulatory Statement as it covers such a wide range of important issues, not all of which are directly relevant to a valuation process.”

The DB Funding Code was also a hot topic in the industry, with some lamenting the code of practice’s delay and others pleased that trustees now have more time to prepare for its implementation.

Bloomfield commented: “The continued wait for TPR’s new funding code of practice is keeping the industry in an uncomfortable regulatory limbo on funding valuations. TPR continues to consistently signpost its direction of travel emphasising that in their view tomorrow’s new laws are today’s best practice.

“But industry really needs to know the details, to put their schemes’ long-term funding plans on a secure regulatory footing.”

Conversely, Legal & General Investment Management head of fiduciary management, Tim Dougall, said: “The new DB Funding Code was initially expected to come into force at the end of 2021, but the regulator is now suggesting late 2022 at the earliest. This will be welcome news for many trustees, giving them more time to prepare for the changes, which could be significant.”

Dougall added that TPR had continued to “highlight the importance of good governance” by advising trustees to prepare for carrying out their own risk assessment in 2022, noting that changes stemming from the Pension Schemes Act would be “keeping trustees busy in the next couple of years”.

LCP partner, Jonathan Camfield, said: “In terms of valuations, although current rules will continue to apply until the end of next year, TPR is clearly keen to ensure that schemes are getting ready now for the ‘new world’ of the new DB Funding Code.”

Overall, the statement was seen by many as a further example of the direction in which the regulator is attempting to steer the nation’s DB schemes, with an emphasis on long-term goals and security.

Insight Investment head of solution design, Jos Vermeulen, said: “The TPR’s overriding aim is that if something happens to your sponsor, it shouldn’t change your ability to pay your members’ pensions, so they're really pushing schemes to get to better funded places, so that they can meet all their cash outflows with a high level of certainty.

“Some people are not taking the new rules too well as they think it's going to make it even less affordable for sponsors but in reality, if you look at where pension schemes are and the timeframe involved, which is probably about 15 years out from now, I think what the TPR has in mind is within reach for most pension schemes.”

Hymans Robertson partner, Laura McLaren, said: “TPR is trying to strike a delicate balance between providing protection to members and enabling employers to focus on their business without overly burdening them. For many employers, the last thing they want to deal with after the last twelve months is a pension scheme valuation.

“Nevertheless, TPR remains apprehensive about companies putting off contributions and exposing members’ benefits to unnecessary risk. Trustees are going to need to be in a position to demonstrate to TPR that the risks they are running can be supported by the business their scheme relies on, that the scheme is being treated fairly and that they’ve explored all appropriate mitigations.”

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