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TPR sets expectations for DB schemes as analysis shows strong affordability but higher deficits

Ref: PN17-28

Issued: Tuesday 13 June 2017

The majority of defined benefit (DB) pension schemes remain affordable but many should do more to tackle increased deficits and reduce risk to pensioners, The Pensions Regulator (TPR) said today.

The call comes as data released by TPR shows how challenging market conditions have led to a jump in deficits and lower funding levels for certain DB schemes.

The analysis (PDF, 853kb, 36 pages) shows the expected positions of DB schemes with valuation dates between 22 September 2016 and 21 September 2017 (Tranche 12 schemes).

The data suggests the majority of DB schemes are supported by employers that can manage deficits, but also highlights the impact of current conditions on the ability of sponsors to maintain and increase deficit repair contributions (DRCs).

It also shows that the ratio of DRCs to dividend payments by sponsoring employers has declined.

The data provides context to TPR’s annual funding statement (AFS) (PDF, 104kb, 12 pages), published last month, which sets out TPR’s expectations for where schemes should increase contributions and cut risks.

Key points of the Tranche 12 analysis include:

  • Many Tranche 12 schemes experienced relatively favourable market conditions when conducting their last valuations (2014, Tranche 9) and as such will have been more significantly impacted by the current market conditions than schemes in earlier tranches.
  • Although asset returns have been better than expected, generally this has not been enough to offset the increase in liabilities due to the change in market conditions, meaning overall deficits have increased and funding levels have fallen.
  • About 50% of Tranche 12 schemes have the resilience to maintain the same pace of funding and many will be able to increase their contributions if the circumstances of the scheme require it.
  • A further 37% of schemes have an employer covenant which TPR considers adequate to support the scheme but their current contribution and/or risk strategies pose unnecessary longer term risks. This risk may be addressed by increased funding now combined, for some schemes, with a reduction in the level of risk.
  • For the group of FTSE350 companies who paid both deficit repair contributions (DRCs) and dividends in each of the previous six years, the ratio of DRCs to dividends declined from around 10% to around 7%. This is mainly driven by the significant increase in dividends over the period, without a similar increase in contributions.

TPR Executive Director for Regulatory Policy, Andrew Warwick-Thompson, said: “It is encouraging that 85 to 90% of schemes currently preparing their valuations have employers with sufficient financial resilience to be able to afford to manage their deficits, and don’t have a long term sustainability challenge. But it is clear that tough market conditions have led to a significant jump in deficits for this tranche of schemes despite their relatively stronger position three years ago.

“Ensuring DB schemes are properly funded is a key priority for us and so our annual funding statement this year takes a more directive approach than in previous years. We have been clear in what our expectations are; where we expect higher contributions into a scheme, and where we expect a scheme to reduce risk to an appropriate level and / or to seek legally enforceable support from its group or parent company. We also want more schemes and sponsors to make use of the flexibilities within the funding framework.

“It is disappointing to see that the ratio of DRCs to dividends has declined from around 10% to around 7%. We are not against companies paying out dividends but employers must strike the right balance between the interests of the scheme and that of its shareholders.

“Having made our expectations so clear in this year’s AFS, if we see a situation where we believe a scheme is not being treated fairly, we are likely to intervene. For example, if a company is paying out more in dividends than in deficit reduction contributions, we will expect to see a short recovery plan. And we will expect that recovery plan to be underpinned by an appropriate investment strategy.”

Editor's notes

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).

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01273 662086

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