Defined benefit schemes are expected to set a long-term funding target (LTFT) with an investment strategy in place to achieve it, according to The Pensions Regulator (TPR).

In its latest Annual Funding Statement (AFS) published today, 5 March, TPR has issued investment guidelines for trustees in order to help them achieve their LTFT, depending on the strength and maturity of their scheme.

Additionally, TPR has outlined its “tough stance” towards companies who pay large dividends when their pension scheme is in a significant deficit.

TPR executive director of regulatory policy, analysis and advice, David Fairs, said: “In order to support schemes we are setting out what we expect trustees and sponsoring employers to consider on funding, investment and covenant.

"The AFS will help them think about the risks facing their scheme, to consider what levels of risk are acceptable and how to mitigate risks where appropriate.”

Trustees will also be expected to have a “comprehensive approach” to integrated risk management, ensuring they are taking an appropriate level of risk as they map out their scheme journey.

LCP partner, Dan Mikulshis, said: “My experience of schemes who have navigated this really well is they have had a collaborative approach between the sponsor and the trustees towards the endgame.”

The guidance has grouped schemes from immature schemes with a strong covenant to mature schemes with a weaker employer and limited affordability.

“In some ways, that has become best practice … I think the AFS is a level up in the industry to where best practice currently is in terms of focus on the LTFT.

“It sits with the general theme of schemes heading towards a tailwind and getting to the endgame faster than previously thought,” Mikulskis added.

The regulator said that the guidance is particularly relevant for schemes who will be conducting valuations between September 2018 and September 2019, adding that it will be engaging with those schemes that have “unacceptably long” recovery plans.

Schemes will also be expected to start their valuation process “in good time”, unless for valid reasons, or they could face an enforcement penalty.

“Trustees have fed back to us that they find this clarity helpful in negotiating good outcomes for members and avoiding interventions and action from TPR,” Fairs added.

TPR confirmed that it will be taking stronger action on the inequitable treatment of schemes, those companies that put dividends before deficit repair contributions.

According to the regulator, it will be contacting schemes where it has concerns regarding ‘equitable treatment’ over the next few months.

Where dividends exceed deficit recovery contributions (DRC), TPR said it expects a strong funding target and a short recovery plan, however if the employer is tending to weak, it expects DRCs to be larger than shareholder distributions.

If the employer is weak, TPR expects shareholder distributions to have ceased.

AJ Bell senior analyst, Tom Selby, commented: “The regulator’s approach is one of hard-nosed pragmatism. While understandably it wants deficits to be plugged as soon as is possible, coming down like a tonne of bricks on strong companies by restricting their ability to reward shareholders would risk strangling economic growth.

“It could also prove counterproductive if this led to a collapse in vital investment and thus weakened the company ultimately responsible for paying pensions.”

TPR said it will contact schemes before they submit their triennial valuation to identify any potential risks which could impact members.

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