The statement confirms that, in TPR’s view, most Tranche 11 schemes will see a greater than expected increase in their funding deficits. Despite this, TPR expects trustees to seek higher employer contributions where there is evidence of “sufficient affordability”.
On the investment front, TPR notes that while overall investment performance in the last three years has been good, yields on long-dated gilts have fallen and market expectations are for interest rates to remain lower for longer and to revert to lower long-term levels. TPR recognises there has been significant recent market volatility for a variety of reasons, including the forthcoming EU referendum, and notes that a further statement may be considered following the referendum result.
Tranche 11 schemes currently undertaking the valuation process would last have done so in 2013, before the concept of integrated risk management (IRM) applied. IRM is now a central feature of the revised DB Code and TPR expects trustees to take a proportionate approach to understanding the scheme’s exposure to risk across the employer covenant, investment and funding. While it is not necessary to eliminate all risk, the funding and risk management strategy should be integrated across these three areas. As usual, TPR highlights that a clear understanding of the employer covenant, a framework for integrated risk management and the trustees, advisers and employers working collaboratively in an open and transparent manner remain fundamental to the funding process.
TPR highlights that trustees should document their decisions, and the reasons behind them, citing any supporting analysis.
In respect of the assumptions used, TPR notes that the 2015 version of the Continuous Mortality Investigation (CMI2015) model produces life expectancies lower than the 2014 version. Trustees who use CMI data may reasonably be expected to update for CMI2015, but should be wary of assuming that decreased life expectancy is to be a long-term trend. Similarly, caution should be exercised in adjusting assumptions for transfer take-up under the new flexibilities, as TPR notes it is still early days for the new pension freedoms.
TPR emphasises that trustees of Tranche 11 schemes must ensure that they finalise the valuation itself, statement of funding principles, recovery plan and schedule of contributions within 15 months after the effective date of the valuation. TPR expects schemes to comply with this statutory deadline, and where there may be difficulty meeting it, trustees are urged to contact TPR at an early stage. There is a greater likelihood of enforcement action being taken trustees where they have not forewarned TPR that they may miss their deadline.