Pension regulator gets tougher on risky deficit planning

The Pensions Regulator (TPR) has signalled it intends to get tougher on companies and trustees to ensure pension scheme members are treated fairly, with updated guidance on how defined benefit (DB) schemes should be funded, reports Pat Sweet

In its latest annual funding statement, the regulator states that where dividends and other shareholder distributions exceed deficit reduction contributions (DRCs), TPR expects a strong funding target and recovery plans to be short.

If the employer covenant is tending to weak or weak, TPR expects DRCs to be larger than shareholder distributions unless the recovery plan is short and the funding target is strong.

If the employer is weak and unable to support the scheme, TPR expects the payment of shareholder distributions to have ceased.

The regulator says trustees and employers should be agreeing a clear strategy for achieving their long-term goals, recognising how the balance between investment risk, contributions and covenant support may change over time, particularly as schemes become more mature and potentially better funded.

A comprehensive approach to integrated risk management (IRM) should allow schemes to ensure they only take an appropriate level of risk with investments. Trustees should be mindful of the additional deficit that could arise from their chosen investment strategy and whether their covenant could support it.

For the first time, and following feedback from trustees and advisers, the annual funding statement includes TPR’s expectations on investment strategies.

David Fairs, TPR’s executive director of regulatory policy, 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 annual funding statement 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 have fed back to us that they find this clarity helpful in negotiating good outcomes for members and avoiding interventions and action from TPR.

‘We have taken a tough stance on schemes that have not been treated fairly and will continue this approach where members’ benefits are under pressure.’

As part of its new regulatory approach, TPR is contacting many more schemes before triennial valuations are submitted to identify potential risks which could impact on members. Areas that will be looked at include equitable treatment of members and long recovery plans.

Mike Smedley, pensions partner KPMG, said: ‘Given the desire to strengthen DB pensions funding, the regulator’s robust stance makes perfect sense. It is challenging employers to fund pension schemes ahead of paying shareholders.

‘But it will create challenges for business, and some employers may be surprised by how much the ground is shifting. Many companies will need to give a higher priority to pensions funding and risk management than they do today and some will come under pressure to either increase pension contributions or cut dividends.

‘More pension schemes can expect enquiries from the regulator challenging their current funding plan. Schemes and employers will need to demonstrate a robust and coherent strategy, which we expect to lead to more innovation and use of contingent assets to bridge the gap between employers and the regulator.’

The Pensions Regulator Annual funding statement 2019 for defined benefit pension schemes

Report by Pat Sweet

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