Of interest to all defined benefit (DB) schemes, is the Pensions Regulator’s (TPR’s) latest annual funding statement, in which it outlines a more proactive approach to ensuring DB scheme members receive the benefits they are entitled to. Proposed actions include intervening early before recovery plans are submitted.
The statement sets out TPR's expectations of trustees, drawing on its own guidance and policy documents to set out a series of actions for all DB schemes, with a focus on “stressed schemes”. The statement indicates a more prescriptive approach to the valuation process, emphasising the need to take appropriate advice and promoting early engagement with TPR.
With the recent BHS saga in mind, it is interesting to note that the statement specifically addresses the need to balance the needs of the scheme and the shareholders, stating that TPR is likely to intervene where “we believe schemes are not being treated fairly”. Given the criticism TPR received during the House of Commons committee proceedings on BHS, it appears that TPR will be looking much more closely at recovery plans and payments to shareholders in the future.
New obligations for “stressed schemes”
Using its risk categories as a measurement, TPR states that its analysis shows that 5 per cent of schemes in the 2017 valuation cycle have an employer which is “tending to weak” or “weak”. The effect of this places the employers at risk of either becoming unable, or already being unable, to adequately support the scheme. TPR recognises that “the least detrimental impact for members' benefits in these circumstances may be for the scheme to continue”. However, it is aware that this may have the effect of “PPF drift” that is, where a scheme's PPF liabilities grow each year as more members reach normal retirement age. The parallel risk is that this increases ongoing funding costs for the scheme's employer.
TPR notes that many of these employers will not be “inevitably insolvent” within the next 12 months and so could not apply to TPR to sever the scheme from the employer using a regulated apportionment arrangement.
In future, TPR will require trustees of “stressed schemes” to show evidence they have taken appropriate measures, such as:
- closing the scheme to future accrual if this has not already been done;
- checking the strength of the sponsoring employer;
- considering whether any payments of dividends made or due to be made limit the ability of the employer to support the scheme and invest in sustainable growth;
- identifying scheme risks and seeking to manage them;
- where scheme rules allow, considering whether the scheme should be wound up.
Focus on scheme valuations
TPR confirms that it intends to take a tougher approach when schemes fail to submit their valuations on time (in 2016 approximately a tenth of DB schemes completed their scheme valuation later than the prescribed 15-month deadline). If schemes anticipate they cannot meet the deadline they should contact TPR, as it is more likely to take enforcement action in relation to a breach if delays could have been predicted, or where trustees do not engage with the process. TPR also calls on trustees to “seek and duly consider robust actuarial advice” from their scheme actuary on the valuation assumptions.
Balancing the scheme and the shareholders
TPR emphasises that it is likely to intervene in schemes where it considers that “schemes are not being treated fairly”. For instance, it will look more closely where it suspects that recovery plan end dates are being extended unnecessarily or where dividend payments to shareholders are being prioritised and this restricts scheme contributions.
We will be publishing a detailed briefing on TPR funding statement in June 2017.
This statement represents a clear indication from TPR that it intends to take a much closer look at how schemes are managing risk, covenant and funding governance, and schemes must take steps appropriate to their circumstances. TPR’s view is that contingency planning is appropriate for all schemes, not just those at risk. In reaction to recent high profile corporate failures, TPR intends to intervene early where a scheme is not being treated “fairly”.
View the funding statement.