TPR calls for robust risk management and employer engagement amid ‘turbulent times’

The Pensions Regulator (TPR) has published its Annual Funding Statement (AFS) 2022, urging defined benefit (DB) pension scheme trustees to ensure they have robust risk management in place and have an open dialogue with scheme sponsors.

The statement outlined how schemes should approach valuations under current conditions, particularly tranche 17 schemes with valuation dates between 22 September 2021 and 21 September 2022.

It noted that DB pension trustees should be alert to the possibility of their schemes’ funding positions, investments and covenants being more volatile amid a landscape of high inflation, higher interest rates and slower economic growth.

TPR acknowledged that it was unclear how the conflict in Ukraine and subsequent sanctions would affect schemes in the UK, but stated that the impact of the conflict on the global economy was a significant risk.

It called for schemes to be alert to change in liquidity demands and cyber risks and warned that employer covenants could be affected by in direct impacts of the conflict, on top of the ongoing challenges of Covid-19 and Brexit.

TPR said these risks should be managed within an integrated risk framework and an open dialogue with employers when assessing a scheme’s covenant.

The AFS gave guidance on adjustments that may need to be made for post-pandemic longevity assumptions, noting that it would not expect reductions in liabilities due to changes in mortality assumptions to be more than 2 per cent, unless accompanied by strong supporting evidence.

While the tables in the AFS were largely the same as the previous year, the reference to the length of recovery plan was changed from ‘shorter than seven years’ to ‘six years’, which TPR said was to reflect that recovery plan lengths had decreased over recent years.

It also reminded schemes that a new funding code was on the horizon and confirmed that it still expected the second consultation on the code to be launched later this year.

The AFS noted that TPR had observed an increase in employers returning cash to shareholders by restarting dividends, paying ‘special’ dividends and share buybacks, following a hiatus during the pandemic.

TPR urged trustees to be alert to this and consider whether their scheme was being treated fairly compared to other stakeholders.

For schemes in deficit, trustees should focus on recovering the deficit, TPR stated, and where employers are experiencing short-term affordability issues, trustees should carefully consider any requests for a temporary reduction in deficit repair contributions.

The regulator said it expected any such requests to be short term, with higher contributions in subsequent years limiting any extension to recovery plan end dates and will continue to view shareholder distributions as being inconsistent with the scheme receiving lower contributions.

For schemes in surplus with appropriate journey plans, TPR called for trustees to ensure that their liquidity needs were covered and to focus on managing risks through contingency planning.

“Favourable investment conditions over the last three years mean that many schemes’ funding levels are ahead of plan, but now is not the time for complacency,” commented TPR executive director of regulatory policy, David Fairs.

“Conditions remain challenging for some schemes and employers and so we urge trustees to continue to focus on their long-term funding target and strategy.

“An actuarial valuation is an opportunity for trustees to review their funding plans and it may be a good time to seek future protections such as contingency plans and dividend-sharing mechanisms.”

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