TPR funding statement reveals ‘much food for thought’ for DB schemes

There remains “much food for thought” for sponsors, trustees and advisers of defined benefit pension schemes when setting funding plans, Pensions and Lifetime Savings Association head of governance and investment Joe Dabrowski has said.

In response to The Pensions Regulator’s annual funding statement, published today, Dabrowski noted that while it is encouraging to see the improved funding level for DB pension schemes, sponsors, trustees and advisers still have to “deal with a number of headwinds”. These include Brexit, which could impact employers’ ability to support schemes.

Club Vita longevity consultant Erik Pickett shared a similar view that the regulator’s statement “provides a timely reminder of pension schemes’ need to focus on longevity assumptions”. He recommended that schemes must assess their “specific membership characteristics” and gain an understanding of “relevant emerging trends” that could affect the scheme since the last valuation.

“With the increased focus on risk management, using all available information to understand schemes’ longevity profiles is more important now than ever,” Pickett added.

In addition to looking to the current valuation period with effective dates between 22 September 2017 and 21 September 2018 (Tranche 13), it has been noted that future planning is also expected of schemes. “We expect more emphasis on planning for future valuations not just the current one, on documenting contingency plans, and on analysing deficit contributions against dividends and overall employer distributions," Aon partner Matthew Arends commented.

As transfer requests increase, TPR has stated that they should also be closely monitored in light of the potential impact on the scheme’s funding and investment strategy and to ensure the right quality of advice is available to members.

Dabrowski added: “We are pleased to see TPR has placed particular emphasis on the possible risks associated with transfer activity. It is crucial for trustees to consider these risks, especially for schemes with a weaker funding position.”

Aon partner Lynda Whitney also supported TPR’s expectations of how trustees should approach pension transfers. “The regulator is increasing its focus on transfer activity by recommending trustees monitor the level of transfers, record the regulated financial advisers being used, and seek advice on liquidity management. High levels of transfer activity combined with maturing schemes can increase a scheme's cash outflow - and schemes need to know how they will manage their liquidity even if there is also adverse investment performance,” she said.

In addition, TPR has been praised for taking a tougher position over trustees overseeing smaller schemes.

Bloomfield said: “Being a ‘small scheme’ isn’t a justification for underperforming trustees. We’re delighted to see TPR take the tougher stance on this. An individual’s lifetime of retirement savings shouldn’t be put at risk simply because they worked for a smaller business.

“The actions TPR calls for are targeted based on different business and scheme circumstances, but the message is consistent across the board: “get on with funding schemes whilst sponsoring businesses are still there to pay for them.

“Given the pace at which pension schemes are maturing, it’s hard to argue against TPR’s direction of travel,” Bloomfield concluded.

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