The Pensions Regulator (TPR) is calling on trustees and employers to work together to manage the immediate effects of Covid-19, in order to ensure pension scheme members are not disadvantaged in comparison to shareholders
Following earlier guidance, the regulator has now published its annual funding statement (AFS) outlining how defined benefit (DB) schemes should approach forthcoming scheme valuations.
This additional guidance deals with key issues in connection with covenant assessments and affordability, scheme funding positions and designing recovery plans.
Charles Counsell, TPR chief executive, said: ‘At the end of December we were seeing a general improvement in funding levels, compared with the previous three years, but the situation now will be very different for many schemes due to the Covid-19 crisis.
‘What is clear is that Covid-19 is testing employers and trustees like never before and it is vital that they work together collaboratively.
‘It is vitally important for all schemes to follow our AFS guidance, and the extra Covid-19 guidance we have issued and will regularly update, to strengthen their position for the tough times which lie ahead.’
The regulator says the AFS is particularly relevant to those conducting valuations with effective dates between 22 September 2019 and 21 September 2020 (Tranche 15) and schemes reviewing their funding and risk strategies.
It warns that March and April 2020 valuations will be challenging. Many trustees will not have sufficient information to form a reliable view on long-term future returns from their scheme's investments and/or their employer's covenant and affordability.
Where needed, trustees may consider delaying decisions about key assumptions until more clarity emerges. However, TPR expects schemes to proceed with as much of the preliminary valuation work as possible.
TPR highlights that, in agreeing to any reduction or suspension of deficit repair contributions, trustees should ensure that dividends and other forms of shareholder return are also suspended.
When preparing recovery plans they should consider taking account of post valuation experience, especially the impact on the scheme's assets and liabilities of the significant changes in market conditions since the effective date of the valuation.
Deficits should be recovered with a focus on the affordability of the sponsor while maintaining equitable treatment and balancing the sustainable growth of the employer.
Alison Stewart, a professional trustee at Dalriada Trustees, said: ‘While not being a panacea, the regulator’s guidance to pension schemes is a good checklist of the issues that are arising now and what the expectation is in terms of a good response to the crisis and funding levels.
‘Specifically, looking at the response to the strength of employers in the crisis, the regulator does not want employers to turn off the pension scheme tap while keeping it on for shareholders.
‘The increasing length of the guidance set out by the regulator is not just a symptom of the current environment, it illustrates the growing complexity in which trustees operate. With the eventual introduction of the DB funding code this is only going to become more complex for trustees.’
At the beginning of March, TPR launched the first stage of a major consultation on its revised code of practice for DB funding. It says the principles of this consultation remain valid but its closing date for submissions has been extended until 2 September.