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Trustees and sponsoring employers must treat scheme members fairly - TPR warns

Ref: PN18-20
Thursday 5 April 2018

TPR publishes its annual funding statement for DB scheme valuations

Trustees and sponsoring employers of defined benefit pension schemes must do more to protect member benefits, The Pensions Regulator has warned.

In its annual funding statement (AFS), published today, TPR says strong employers should consider contributing more money to reduce scheme deficits over a shorter period of time, especially where they are paying out high dividends.

Where there is a weak employer, trustees and employers should work together to give greater consideration to the needs of the scheme.

The AFS clearly sets out what TPR expects from trustees and employers, according to the ability of the employer to support the scheme and the scheme’s funding strategy. It is particularly relevant to schemes calculating valuations with effective dates between 22 September 2017 and 21 September 2018 (Tranche 13).

TPR remains concerned about the growing disparity between dividends and deficit-reduction payments and expects fair treatment between shareholders and trustees. It will act if a scheme is not treated fairly by using existing powers, while working with government to implement new powers proposed in DWP’s DB White Paper.

At the same time, TPR has stepped up its proactive DB funding case work by 90% to support trustees as they prepare valuations and recovery plans.

Anthony Raymond, Interim Executive Director of Regulatory Policy, said: “In our 2018 AFS we are being clearer about our expectations of how trustees should approach their scheme valuations.

“Recent corporate failures have shown the risks of long recovery plans while payments to shareholders are excessive, relative to deficit-repair contributions.

“Trustees should negotiate robustly with the sponsoring employer to secure a fair deal for the pension scheme, while employers should balance the interests of pension savers with returns to shareholders and investors. We are working more closely than ever with trustees to support them in this process.

“However, if trustees fail to act we can intervene to protect members by using the full range of powers available to us now. We are also working with government to implement its white paper proposals.”

The AFS includes guidance on how trustees should approach a valuation and the current issues that may affect them, such as market conditions and the impact of Brexit. At an aggregate level for schemes in the current tranche of triennial valuations, TPR estimates that the funding level is likely to be marginally better compared to three years ago.

However, TPR’s data suggests there could be a wide variance between the circumstances of individual schemes, depending on their approaches to risk-management.

With continuing economic uncertainty, the AFS stresses the importance of risk-management and contingency planning. It also highlights that dividend payments may not be the only form of “leakage” of value from the companies which support DB schemes. Other examples include intra-group loans and transfers of business assets at less than fair value. 

Member transfer requests should also be closely monitored in light of the potential impact on the scheme’s funding and investment strategy and to ensure the right quality of advice is available to members.

TPR has a range of powers and interventions which may be available where it is concerned that a pension scheme is not being treated fairly, or is poorly governed, including setting valuations and recovery plans, commissioning skilled person’s reports, issuing improvement notices and imposing penalties, suspending/prohibiting trustees, appointing independent trustees, or taking anti-avoidance action.

Editor's notes

  1. Schemes should read the AFS alongside TPR’s code of practice on scheme funding and supporting guidance on IRM, investment and covenant.
  2. Last month the DWP published its White Paper, Protecting Defined Benefit Pension Schemes, setting out proposals to improve confidence in DB pensions. As part of this initiative TPR will revise its DB Code, giving greater clarity on its expectations for recovery plans. As well as working closely with the DWP and PPF on the new Code, TPR will hold industry roundtables this spring and set up an industry expert group.
  3. Last year the average length of a recovery plan was eight years.
  4. 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).

Press contacts

Matt Adams 01273 662086

David Morley 01273 662091

pressoffice@thepensionsregulator.gov.uk

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