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Turbulent times mean trustees must have robust risk management and open dialogue with employers

Ref: PN22-11

Issued: Wednesday 27 April 2022

The Pensions Regulator (TPR) publishes its 2022 Annual Funding Statement.

In the current economic climate, trustees of defined benefit (DB) pension schemes should be alert to the possibility of their scheme’s funding position, investments and covenant being more volatile and potentially changing quickly.

This is just one of the expectations TPR outlines in its Annual Funding Statement (AFS) 2022, published today (27 April 2022).

Trustees will be approaching triennial valuations at a time of high inflation, high energy prices, higher interest rates and slower economic growth – all of which may impact the scheme’s assets and liabilities, as well as employer covenants.

It is unclear how the conflict in Ukraine and the sanctions imposed will affect UK schemes. A significant risk is the impact the conflict may have on the global economy. Schemes need to be alert to changes in liquidity demands and cyber risks; the longer term impact on funding positions could be significant. Employer covenants could also be affected by indirect impacts on their customer base, supply chain or financing costs. For many businesses these factors will be coming on top of the ongoing challenges of COVID-19 and Brexit.

The longer-term impact on future mortality trends as a result of COVID-19 continues to be a further area of uncertainty.

These risks should be managed within an integrated risk framework and an open dialogue with employers when assessing a scheme’s covenant.

David Fairs, TPR’s Executive Director of Regulatory Policy, said: “Favourable investment conditions over the last three years mean that many schemes’ funding levels are ahead of plan, but now is not the time for complacency.

“Conditions remain challenging for some schemes and employers and so we urge trustees to continue to focus on their long-term funding target and strategy.

“An actuarial valuation is an opportunity for trustees to review their funding plans and it may be a good time to seek future protections such as contingency plans and dividend-sharing mechanisms.”

The AFS notes that following a hiatus during the pandemic, TPR has seen an increase in employers returning cash to shareholders by restarting dividends, paying ‘special’ dividends and share buybacks. Trustees should be alert to this and consider whether their scheme is being treated fairly compared to other stakeholders.

Where schemes are in deficit against their technical provisions (TPs), trustees should focus on recovering the deficit. Where employers are experiencing short-term affordability constraints, trustees should carefully consider any requests to accept a temporary reduction in deficit repair contributions. TPR expects any such request to be short term, with higher contributions in subsequent years limiting any extension to recovery plan end dates, and will continue to view shareholder distributions as being inconsistent with the scheme receiving lower contributions.

Where schemes are in TP surplus and have appropriate journey plans, trustees should ensure their liquidity needs are covered and focus on managing risks through contingency planning.

Notes for editors

  • The AFS is for trustees and sponsoring employers of DB occupational pension schemes. It is particularly relevant to schemes with valuation dates between 22 September 2021 and 21 September 2022 (Tranche 17, or T17 valuations), as well as schemes undergoing significant changes that require a review of their funding and risk strategies.
  • The T17 valuations are spread over dates between September 2021 and September 2022. Approximately 25% take place at dates around 31 December 2021, and a little over 50% take place at or near 31 March 2022. Funding positions usually vary depending on the exact valuation date.
  • If a trustee is concerned about longer term covenant risks, they may wish to consider plans to reduce longer-term covenant reliance. It is important for trustees to understand key risks to their scheme and the effectiveness of their strategies to manage them. Each scheme should consider its position depending on its own circumstances. In its new AFS, TPR sets out guidance for trustees to focus on the key elements of their funding plan.
  • 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; 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

Out of hours

This is for journalists only with a media enquiry. The below number will divert to our on call media officer.
01273 648496

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