Dalriada’s Andy Scott suggests there may be some difficult choices ahead.
Things are about to get tougher for many sponsoring employers following the publication of The Pensions Regulator’s (TPR) annual funding statement for 2019. This relates to defined benefit (DB) schemes undergoing actuarial valuations with an effective date between 22 September 2018 and 21 September 2019 (Tranche 14 schemes).
Following the large falls in world stock markets in the last Quarter of 2018 and the drops in gilt yields to record low levels in the first Quarter of 2019, schemes with 31 December 2018 or 1 or 6 April 2019 valuation dates could be facing some difficult and possibly unexpected choices.
The statement is in line with TPR’s new “clearer, quicker, tougher” approach and it leaves no room for doubt about its expectations. The key points are:
|In a nutshell|
|Trustees and sponsoring employers should adopt a Long-term Funding Target (LTFT), which will recognise that the balance between investment risk, contributions and covenant support may change over time.|
|Where TPR has concerns over ‘inequitable treatment’ (e.g. payment of dividends favoured above pension deficit payments), or the length of recovery plans (e.g. longer than the median recovery plan length of seven years), Trustees will need to justify their actions and explain how short-term investment and funding strategies will work alongside the LTFT.|
|Trustees should plan ahead for the valuations to ensure they are submitted in good time, with TPR warning of greater intervention and penalties for schemes with late valuations.|
TPR has recognised that problems could arise for the Tranche 14 Schemes and so will contact many more schemes before triennial valuations are submitted. This will help Trustees identify the potential risks which could affect their members (and the sponsoring employer) in advance of their discussions with the sponsoring employer.
However, even with this advance warning, sponsoring employers and Trustees could engage in discussions that have never previously been raised during the valuation process. For example, unless there is an otherwise good reason, TPR is now expecting Trustees to ensure that deficit reduction contributions exceed shareholder dividends in schemes where the employer covenant is weak or tending to weak. That will not be easy for either side in such circumstances, but, provided the guidance is clear, and both sides understand each other’s different positions, the right balance can be struck between the members’ and shareholders’ interests.
Obviously, a lot of schemes will have strong or tending to strong covenants and discussions will not be quite so difficult. Although long recovery plans will still be subject to TPR scrutiny, especially if large dividends are being proposed. So, it is unlikely to be an easy period for many Trustees and sponsoring employers (and I haven’t even mentioned Brexit!). But with proper guidance from TPR and the parties’ respective advisers, the discussions might actually make things clearer and bring the two sides closer together. Here’s hoping!!
To read the statement in full, please go to: