Key Dates

Annual funding statement issued on 30 April 2020.

The Regulator will consider issuing further guidance in autumn 2020, as the duration and impact of the current economic uncertainty evolves.

Summary

The Pensions Regulator has issued its 2020 funding statement, aimed especially at schemes whose actuarial valuations have an effective date between 22 September 2019 and 21 September 2020 (the "T15" cohort), plus schemes undergoing significant changes that require a review of their funding and risk strategies.

Following positive feedback to the 2019 funding statement, the Regulator has reproduced and updated the tables used last year to target pension schemes in different circumstances. When using the tables, the Regulator suggests that trustees identify the table closest to their position by first deciding:

• how the employer covenant has changed because of COVID-19;
• how the covenant could be impacted by Brexit; and
• how good the funding position is compared to the long-term funding target

Key points include the following.

• Approximately 25% of valuations in the T15 cohort have valuation dates around 31 December 2019.  Feedback to the Regulator suggests that at 31 December 2019 there was a general improvement in funding levels compared to three years previously.

Consultation on DB funding code

• The first consultation on the new funding code has been extended to 2 September 2020.  The second consultation will be published in 2021 and the new code is not expected to have effect until late 2021 at the earliest.

Funding levels

• Just over 50% of valuations in the T15 group have valuation dates around 31 March 2020.  The Regulator's research has shown funding positions at that date to be very variable, varying from:
  • Schemes with low exposure to equity markets and good levels of hedging, whose funding levels are above target or slightly below.  These schemes are encouraged to remain focussed on their longer-term targets.
  • Schemes whose funding levels have fallen sharply because of risks included in the scheme's integrated risk management (IRM) policy are expected to implement any contingency plans in their IRM where possible.  In other cases, trustees and employers should consider how far the scheme funding has diverged from the long term funding objective and develop strategies to put this back on course.

Taking account of post-valuation experience

• As outlined in its Covid-19 guidance, the Regulator does not expect schemes which are close to completing their valuations to revisit their valuation assumptions following recent market movements.  However, post-valuation experience should be considered when agreeing recovery plans, especially in relation to the affordability of contributions for the employer.
• Schemes with a valuation date around 31 December 2019 have more time to complete their valuations and should consider taking account of post-valuation experience, especially the impact on asset and liability values and the employer covenant, in their recovery plans.

Changing the valuation date

• Trustees should take legal and actuarial advice before agreeing to bring forward a valuation date from late March 2020 to an earlier date at which market conditions were considered more "normal".  In addition, trustees in this position are expected to consider "very carefully" why agreeing to bring the valuation date forward would be in the best interests of members and the impact of doing so on member security.
• The Regulator expects to question trustees who agree to an earlier valuation date about their reasons for the change.

March and April 2020 valuations

• The Regulator recognises that March and April 2020 valuations will be challenging, and that it may be difficult to form a reliable view on long-term future investment returns or the employer's covenant.  It would be reasonable for trustees to delay deciding on technical provisions (TP) assumptions until there is more clarity.  However, trustees are expected to get on with as much preliminary work on the valuation (such as validating data) as possible.
• Trustees are expected to consider a range of possible future outcomes when considering their TP assumptions and are encouraged to seek input from advisers on scenario planning.

Recovery plans and affordability

• The Regulator expects trustees to carry out additional due diligence on the employer covenant, then to deal with any changes in the pension deficit.  Recovery plans should be agreed focussing on affordability while maintaining fair treatment of the pension scheme.
• Trustees and employers are expected to agree incremental increases to contributions, linked to the employer's recovery.  Where trustees have accepted additional investment risk, additional contributions could be payable if scheme investments underperform.

Intervention by the Regulator

• The Regulator expects trustees and employers to be fully aware of its expectations in the annual funding statement and wider guidance, and to be prepared to justify their approach with supporting evidence.
• Schemes which already have a long term funding target (LTFT) in place, with strategies for managing short term departures from the path towards meeting the LTFT, should be able to continue to focus on the LTFT with appropriate short term modifications.
• Other schemes are encouraged to set an LTFT consistent with how the trustees and employer expect to deliver benefits, and to be prepared to evidence that their short term funding and investment strategies are aligned with the LTFT.

Covenant assessment

• Covenant assessments should focus on the employer's ability to make cash contributions to the scheme to achieve and maintain full funding over an appropriate period.  Downside risks should be considered and scenario testing may be appropriate.
• Where relevant, trustees are expected to review the potential impact on the employer's business of different outcomes of the trade negotiations with the EU, including the possibility of leaving the current arrangement in December 2020 on World Trade Organisation terms.
• In current conditions, the Regulator expects the frequency and intensity of covenant monitoring to be significantly increased until covenant visibility and strength is restored. 
• Trustees are expected to have contingency plans in place, ideally agreed with the employer, with specific actions agreed should trigger points associated with key risks be met. Trustees may be asked for evidence that they have had discussions with the employer about contingency plans.

Covenant leakage

• Trustees are expected to be vigilant about covenant leakage, especially where a long recovery plan is agreed because of employer affordability, and to seek suitable protection where they consider that covenant leakage is not justified.
• Trustees should understand the intention behind any cash pooling or inter-company lending and the ability of the employer to retrieve funds.

The Regulator is concerned about group trading arrangements and intra-group charges and fees, unless these are on third party commercial terms. 

Date Accessed: 03/12/2021