The Pensions Regulator has estimated that defined benefit schemes in tranche 13, with valuations between September 2017 and September 2018, are likely to see an increase in their liabilities since their last valuation.

Publishing its analysis for tranche 13 schemes, the regulator also stated that although most schemes will see lower deficits, compared to their previous valuation date, they will not have reduced as much as would have been expected over the three years. As a result the regulator said schemes’ current recovery plans will not be on track to remove their deficit, and warned trustees to make changes.

“The changes in market conditions mean that deficits on a technical provisions (TP) basis for the DB universe will be marginally better based at March 2018 relative to March 2015. This analysis may not be representative of individual schemes whose assets and liabilities will depend on many scheme-specific factors,” it said.

Despite this, the regulator said that companies’ profit before tax and shareholders’ funds, along with the relative increase in dividends compared to deficit reduction contributions, highlights that employers’ affordability may have increased.

“This increased affordability means that they may also have a greater number of deficit management strategies available to them than before. Furthermore the increase in dividends suggests an increase in affordability which could be used to shorten recovery plans instead,” the regulator said.

The regulator explained that the increase in liabilities is due to a reduction in yields and expectations for interest rates and inflation having an impact on expected returns across various asset classes. It expects that many schemes will have set funding strategies based on lower expected investment returns from most asset classes than at their last valuation.

Earlier this year, TPR published its annual funding statement for DB schemes, which it said was particularly relevant for tranche 13 schemes. The regulator said that trustees and sponsoring employers of DB schemes must do more to protect members’ benefits. For companies in a weaker position, TPR highlighted that pension scheme liabilities should take greater priority than shareholder returns.

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