TPR publishes 2016 annual funding statement
Friday 13 May 2016
Despite market pressures, the majority of defined benefit (DB) schemes should be able to at least maintain existing recovery plans.
The Pensions Regulator (TPR) published its annual funding statement today showing its analysis of market conditions and how sponsoring employers and trustees of DB schemes can agree appropriate funding plans.
While most schemes are expected to have larger deficits, the majority of employers are likely to be in a position to be able to maintain or increase contributions to their scheme.
The annual funding statement is primarily aimed at schemes undertaking valuations with effective dates in the period 22 September 2015 to 21 September 2016 (2016 valuations), but is relevant to all trustees and sponsoring employers of DB schemes.
The annual funding statement says that:
- Trustees and employers should work together to put in place a plan that fully takes into account the amount of risk the scheme is exposed to and the ability of the sponsor to support those risks.
- There was significant volatility in the financial markets especially at the start of 2016, which may impact on a scheme’s reported funding position.
- TPR expects most schemes to have a larger than expected deficit on their valuation date and so trustees will need to review their recovery plan and make changes to it.
- Many employers have also seen increased profitability, allowing them to pay more into company pension schemes, though some companies are still having a difficult time.
Our analysis suggests that:
- In general, there has been an increase in employers’ reported profits and improvement in balance sheets since schemes last valuation dates
- The ratio of deficit recovery contributions (DRCs) to dividends has declined over the last five years. For the FTSE350, the median fell from around 17% in 2010 to less than10% in the latest data, meaning more than half of FTSE350 companies paid out ten times or more to shareholders than to their scheme.
- Approximately half of recovery plans of schemes carrying out valuations in 2016 have five years or less remaining to run.
- For employers who reported a profit, in order to maintain existing recovery plan end dates:
- Around three out of five could increase contributions and this would represent them paying less than 10% of their profits or the same or lower percentage of profits to the scheme than currently.
- Around two out of five may need to pay more as a percentage of profits than currently, but for many this would still be a low proportion of profits and is likely to be affordable.
Andrew Warwick-Thompson, Executive Director of Regulatory Policy, said: “Schemes’ deficits are likely to have increased in many cases. Trustees and employers will need to work together in adjusting their recovery plans and putting in place an integrated risk management plan that reflects a common understanding of the schemes risks and the employer’s ability to underwrite those risks. Our guidance on integrated risk management will help them to do this.
“Our data suggests that profits have increased for the majority of employers and that many are able to maintain or increase current DRCs. We understand that investing for growth in their business will mean some employers cannot increase DRCs. We expect employers to discuss this openly with their trustees. It is important that employers treat their pension scheme fairly and we expect trustees to question employers’ dividend policies where DRCs are constrained. Our DB code and covenant guidance can help both parties have constructive discussions in these circumstances.
“The extensive guidance we produce is designed to support trustees and sponsoring employers to reach sensible agreements, but we stand ready to help in those cases where they fail to agree.”
TPR continues to engage proactively with a number of schemes while they are discussing their valuations. Later this year, it plans to publish a review of the first tranche of schemes to carry out a valuation under our revised DB code of practice on scheme funding and additional guidance on setting an investment strategy.
TPR is the regulator of work-based pension schemes in the UK. Our statutory objectives are: to protect members’ benefits; to reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only).
David Morley 01273 662091
Matt Adams 01273 662086