Key Dates

Annual funding statement 2018 issued on 5 April 2018.

Summary

The Pensions Regulator (tPR) has issued its annual funding statement aimed, in particular, at schemes whose valuations have effective dates between 22 September 2017 and 21 September 2018 (Tranche 13).  Points to note include the following.

• Tranche 13 schemes are expected to have marginally better funding levels than at their previous valuations, although schemes which did not hedge interest rate and inflation risks are likely to be in a worse position than those which did.
• tPR is concerned at an increasing disparity between dividend growth and deficit repair contributions.  It expects trustees to assess the impact of dividends on the employer's covenant and whether the scheme is being treated fairly. 
• Trustees should also be aware of forms of "covenant leakage" other than dividends, such as inter-company loans or transfers of assets at less than market value.
• Where a scheme has a strong employer:

o    trustees should consider strengthening the technical provisions, increasing contributions or shortening the recovery plan. 

o    if dividends and other forms of "covenant leakage" are disproportionate to contributions, tPR expects a short recovery plan; and

o    strengthening short term security should be considered, such as through contingent assets and guarantees.

• Where a scheme has a weak employer:

 o    scheme liabilities should be prioritised over shareholder returns;

o    cash should be retained within the employer to fund sustainable growth and to address the pension deficit;

o    an appropriate reward for employer growth should be secured and / or other forms of support (such as contingent assets and guarantees) should be maximised; and

o    where there is limited affordability of additional contributions, trustees should seek opportunities to reduce risks.

•  Trustees are expected to prioritise risks according to the likely effect on the scheme's long-term funding target and the employer's ability to provide support.  Trustees should also consider short-term risks, such as a sudden downturn in the employer's business.
• Trustees are expected to have workable contingency plans with, where possible, legally enforceable rights of recourse (such as rights over secured assets).  In other cases, trustees and employers should agree actions to support the scheme if specific risks materialise.
• Where employers seek to retain cash because of uncertainty surrounding Brexit, tPR expects that shareholders should share the burden proportionately.
• Trustees should consider carefully before making allowance for expected future transfers out in their valuation.  Transfer activity should be monitored and recorded, and should take into account the impact on the scheme's investment strategy and cash flow.
• Trustees are warned not to agree to an inappropriate valuation and recovery plan just because the statutory deadline is approaching.  

Date Accessed: 28/05/2022