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Trustees and employers must work together to protect savers – TPR

Ref: PN20-16

Issued: Thursday 30 April 2020

Trustees and employers must work together to manage the immediate effects of COVID-19 with a focus on long-term planning and risk management to protect savers, The Pensions Regulator (TPR) said today.

In its latest Annual Funding Statement (AFS) TPR outlines how defined benefit (DB) schemes should approach forthcoming scheme valuations. It highlights how schemes which follow its guidance can balance the impacts on employers while putting them in a stronger position to improve their funding positions.

Many schemes are being impacted by COVID-19 and TPR has already issued guidance to support trustees and employers. The additional guidance in today's statement deals with key issues in connection with covenant assessments and affordability, scheme funding positions and designing recovery plans.

TPR Chief Executive Charles Counsell said: “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.

“It is vitally important for all schemes to follow our AFS guidance, and the extra COVID-19 guidance we have issued and will regularly update, to strengthen their position for the tough times which lie ahead.”

TPR’s expectations are clearly outlined in the AFS, which sets out how it expects trustees and employers to approach their valuations and scheme funding in conjunction with their employers. It is particularly relevant to those conducting valuations with effective dates between 22 September 2019 and 21 September 2020 (Tranche 15) and schemes reviewing their funding and risk strategies.

The statement is based on analysis conducted since the outbreak of COVID-19 and finds that the funding position of many defined benefit (DB) schemes that have low exposures to equity markets and good levels of hedging should be in a stronger position than might be expected in the current climate.

If these risks were considered in an Integrated Risk Management (IRM) framework, trustees should have contingency plans which TPR expects to be implemented where possible. Where this was not the case, trustees and employers need to consider how far they may have strayed from their longer-term objective and develop strategies to put them back on course.

March and April 2020 valuations will be challenging. Many trustees will not have sufficient information to form a reliable view on long-term future returns from their scheme's investments and/or their employer's covenant and affordability. Where needed, trustees may consider delaying decisions about key assumptions until more clarity emerges. However, TPR expects schemes to proceed with as much of the preliminary valuation work as possible

TPR recognises the impact that COVID-19 will have had on some employers. Consistent with TPR’s COVID-19 guidance, in agreeing to any reduction or suspension of deficit repair contributions, trustees should ensure that dividends and other forms of shareholder return are also suspended.

At the beginning of March, TPR launched the first stage of a major consultation on its revised code of practice for DB funding. The principles of this consultation remain valid but its closing date for submissions has been extended until 2 September.

Notes for editors

  1. The key principles behind TPR’s expectations are as follows:
    • Trustees should consider obtaining independent specialist advice to support covenant assessment at a time when many employers will have been significantly affected.
    • The current circumstances accentuate the importance of trustees working collaboratively with their employer.
    • Trustees considering changing their valuation date should obtain and consider legal and actuarial advice.
    • Trustees should use the valuation period to assess the market conditions and form a view on the long-term effects for their scheme.
    • Where trustees agree to reduce or suspend DRCs, they should ensure that dividends and other forms of shareholder return are also suspended.
    • When preparing recovery plans they should consider taking account of post valuation experience, especially the impact on the scheme's assets and liabilities of the significant changes in market conditions since the effective date of the valuation.
    • Deficits should be recovered with a focus on the affordability of the sponsor while maintaining equitable treatment and balancing the sustainable growth of the employer.
  2. Tranche 15 valuations are spread over dates between September 2019 and September 2020, approximately 25% taking place at dates around 31 December 2019 and a little over 50% at or near 31 March 2020. Funding positions usually vary depending on the exact valuation date, and this year more so than others.
  3. IRM is an important approach that helps trustees to assess, prioritise and manage the employer covenant, investment and funding risks.
  4. TPR’s IRM guidance published in 2015 is an example of its commitment to helping trustees to improve their knowledge and understanding.
  5. Last year’s AFS also highlighted the importance of trustees and employers agreeing a strategy for achieving their long-term goals, as schemes become more mature and potentially better funded. It also outlined how a comprehensive approach to Integrated Risk Management (IRM) should allow schemes to ensure they only take an appropriate level of risk with investments.
  6. The Pensions Regulator 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

David Morley

Media Officer (DB)
01273 662091

Matt Adams

Senior Media and Parliamentary Manager
01273 662086

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