The Pensions Regulator (TPR) annual funding statement shows the vast majority of DB schemes are now showing a surplus — with the regulator stating it expects them to shift their focus from deficit recovery to endgame planning as a result.
This is the first annual funding statement under the new DB funding code. It shows that just over half of schemes (54 per cent) are in surplus on a buyout basis, rising to 76 per cent on a low dependency basis and 85 per cent on a technical provision basis.
The AFS contains information for trustees and employers for schemes undertaking their first valuation under the new DB funding regime. It clarifies areas surrounding covenant and trustee’s assessment of supportable risk.
TPR’s director of trusteeship, administration and DB supervision, David Walmsley, say “With improved funding levels we expect a shift in focus f to endgame planning. Our new DB funding code equips schemes to make these changes, and to better understand their funding strengths and risks.”
“Despite healthy funding positions, trustees should keep in mind the potential for heightened trade and geopolitical uncertainty and understand any risks to their scheme’s investment strategy and employer covenant.”
Walmsley adds: “Trustees should also be considering how they would respond to potential requests from employers to release some of their scheme’s surplus.”
TPR has previously expressed support for government proposals regarding the use of surpluses in DB pension schemes to support economic growth and improve saver outcomes.
He pointed out that TPR has published information on this topic. He says schemes need to adhere to current legislation and scheme rules regarding funding surpluses but says further details on government plans on this issue are anticipated in the upcoming Pension Schemes Bill.
Walmsley adds: ”We expect around 80 per cent of schemes to be able to meet the ‘fast track’ approach, resulting in less TPR engagement and lower regulatory burden on schemes through simpler reporting. Trustees can also opt for the equally valid bespoke option. We encourage trustees to collaborate early with advisers and employers to determine the most suitable approach.”
In coming weeks, TPR will launch a new ‘Submit a scheme valuation’ digital service, including a statement of strategy spreadsheet. All information for valuations with effective dates on or after 22 September 2024 must be collated and submitted by schemes using these tools.
This annual funding statement was broadly welcomed by the industry.
Hymans Robertson head of DB scheme actuary services Laura McLaren says: “With schemes tackling their first valuations under the new funding regime, it’s not a surprise to see this year’s statement from TPR speaking in large part to those new requirements. DB endgames, surplus sharing and market volatility all get notable airtime too.
“On the funding code, there is little in this year’s statement by way of additional technical guidance, but there are some helpful clarifications addressing areas such as covenant, supportable risk and what ‘proportionality’ looks like as schemes wrestle with putting the theory into practice.
“ TPR also confirm the new ‘Submit a scheme valuation’ digital service will launch soon – the final piece of the puzzle for collecting scheme data and plans. Detail on how TPR will assess submissions remains fairly scant, though they state they will be ‘risk-based and outcome focused’ when deciding which schemes to interact further with and less likely to engage with schemes going Fast Track.”
She adds: “Nevertheless, until clearer market practice develops, keeping compliance proportionate remains a tricky balancing act, especially with schemes becoming increasingly well-funded.
“Beyond the immediate requirements of the new funding code, TPR also go further in discussing the growing interest in DB surpluses than we’ve seen in previous statements. Although more specifics will come as part of the upcoming Pensions Bill, it is encouraging that TPR are committing to publishing more DB endgame guidance in the coming weeks.”
Aon associate partner Emma Moore adds: “As the industry awaits a response from Government to its DB Options consultation, the suggestion for trustees to consider how they would respond to a request from the sponsor to release surplus is sensible. The conclusions reached at the first valuation under the new regime may also inadvertently become benchmarks for discussions on surplus release.”
