The Pensions Regulator has issued its annual funding statement, urging trustees and employers to work together to manage the immediate financial problems caused by the Covid-19 lockdown.
However TPR stresses that there also needs to be a focus on long-term planning and risk management to protect savers. The statement outlines how defined benefit schemes should approach forthcoming valuations with additional guidance to how to balance the financial difficulties of employers over the short term, with the longer-term funding needs of pension members.
The regulator has already issued guidance to support the DB schemes that are impacted by Covid-19. However this funding statement contains further information related to covenant assessment and affordability, scheme funding positions and designing recovery plans.
TPR chief executive Charles Counsell says: “At the end of December we were seeing a general improvement in funding levels, compared with the previous three years, but the situation now will be very different for many schemes due to the Covid-19 crisis. However, we don’t yet know the full impact the crisis will have on the pension landscape.
“What is clear is that Covid-19 is testing employers and trustees like never before and it is vital that they work together collaboratively.
“We are clear that the best support for a pension scheme is a strong employer and so we are here to support both groups in our role to ensure savers’ retirements are protected.”
The statement was welcomed by many in the industry. Hymans Roberston partner Laura McLaren says: “It’s no surprise that Covid-19 is a major theme for this year’s annual funding statement. However, whilst trustees and employers will need to work together to manage the immediate impact, TPR is clear that the focus should remain on long-term planning and robust risk management.
“March and April 2020 valuations will be challenging. However, I’d encourage trustees to use the time and flexibility in the funding regime to navigate the prevailing market conditions and uncertainty.
“The timing and shape of any rebound will be highly dependent on both containment of the virus and the effectiveness of policy responses. We therefore support the emphasis on testing different potential future scenarios as a key tool to inform decisions, assess risks and implement meaningful contingency plans.
“Conversely, if schemes are looking for quick fixes (for example by changing valuation dates) or trying to cherry pick post-valuation experience they should expect scrutiny.”
The Society of Pension Professionals president elect, James Riley adds: “Whilst TPR’s annual funding statement encourages schemes to focus on their ultimate targets, as expected during this current environment it recognises the difficulty in forming views on long-term assumptions especially for those schemes with forthcoming valuations.
“It suggests two reasonable and complementary approaches to this – delaying setting assumptions until more clarity emerges and using scenario planning to test the robustness of potential funding plans.
“The document is also clear that where a scheme is taking additional risk supporting a sponsor it should share in the sponsor’s recovery through increases to contributions. Schemes may be prepared to share some of the pain now but sponsors should recognise their need for exposure to the upside when things start to recover.”
In this annual statement the TPR also said it would be warning savers of the potential risks involved in DB to DC transfers.
The People’s Pension director of policy Gregg McClymont adds: “We are living through a unique moment in recent history, with the economy having been locked down for the greater good, but at heavy financial cost to some individuals and households. The move by the regulator is to be welcomed. The problems in the DB to DC transfer advice market are now well known and understood.”