The Pensions Regulator’s (TPR) annual funding statement aims to keep up pressure on schemes but tries to avoid putting undue strain on employers at a time of crisis, the industry says.
Analysis of the annual funding statement 2020 shows the watchdog is still expecting schemes to get a fair share of available cash despite the disruption caused by Covid-19.
Lane Clark & Peacock (LCP) said the latest guidance puts a clear expectation on trustees to look closely at all the different ways in which potential support for the pension scheme can ‘leak' through things such as dividend payments, financial flows across the group, transfers of businesses or assets at less than market value or excessive executive remuneration.
It added that, while some schemes with three-yearly valuation dates that fall in the middle of the current crisis have expressed an interest in flexing the valuation date, the regulator had urged trustees to consider whether this would be ‘in the best interest of members' - implying that it will be member outcomes not the concerns of sponsors that should determine how this issue is approached.
LCP head of pensions research David Everett said: "TPR is trying to strike a delicate balancing act between its general direction of travel in recent years, which has been to be ‘clearer, quicker and tougher' with schemes and employers, and the need to avoid putting undue pressure on employers in the current environment.
"The latest funding statement still has elements of the new tougher approach, including expecting trustees to be vigilant if it seems that money that could have been used for the pension scheme has ‘leaked'. On the area of exercising flexibility on scheme valuation dates, TPR seems to be advocating against, unless this is demonstrably in the interest of scheme members."
Willis Towers Watson agreed the regulator was trying to maintain a balancing act in its latest funding statement.
Head of scheme funding Graham McLean explained: "One of the balancing acts at this round of valuations will be ensuring that the scheme gets a share of any economic upturn without demanding too much and choking off the employer's recovery."
He added: "Some of the clear statements about dividends from previous annual statements have not been reiterated - for example, that shareholder distributions should only exceed deficit payments if funding targets are strong and recovery plans short. That's surprising, as the regulator has routinely been writing to schemes where it feels that dividends are too high. Perhaps it feels that this will be less of a problem now that some employers are suspending or reducing dividends to preserve cash, and that the priority now is to ensure that these employers pay what's due to the pension scheme before switching dividends back on.
"Instead, the regulator goes into more detail about the other forms of covenant leakage that it has always told trustees to be alert to, emphasising that what the employer can afford to pay into the pension scheme should be assessed before various payments to other group companies have been made."
Aon said the full flexibilities of the current regime would be needed for 2020 valuations despite the funding statement but noted that schemes could push on with valuations despite Covid-19.
Aon head of UK retirement policy Matthew Arends explained: "From a practical perspective, this is a time when schemes with 2020 actuarial valuations can press on with data collection and calculations regardless of these differences - but Aon would advocate that they then step back from past valuation policies and re-assess the situation. If necessary, they can form interim views on covenant strength and affordability, before reviewing all the conclusions at the time the valuation is completed."
He added: "We support the TPR's view that there are sufficient flexibilities available that do not require the valuation date to be moved. Although we agree with the principle of considering post-valuation experience, there are practical difficulties to allowing for this directly in the Recovery Plan that can cause difficulty at the time or later - so it isn't a silver bullet.
"We recommend that post-valuation experience is taken into account informally, for example in the level of outperformance in the recovery plan that the trustees are comfortable with."
Hymans Robertson partner Laura McLaren said the regulator's emphasis on testing different potential future scenarios as a key tool to inform decisions, assess risks and implement meaningful contingency plans was welcome - and schemes should not expect "quick fixes".
She said: "If schemes are looking for quick fixes (for example by changing valuation dates) or trying to cherry pick post-valuation experience they should expect scrutiny.
"By once again segmenting businesses and schemes into categories, TPR is able to be more directive about what it expects. Schemes will have fared differently, depending on how well funded they were at the start of the crisis, their investment strategy and also their level of hedging. With some companies and industries being hit harder than others, sponsor covenant and affordability will be key."
McLaren concluded: "TPR has been consistent in advocating fairer treatment for pension schemes relative to shareholders for some time. However, with many trustees being asked to support the sponsor over a difficult, but hopefully temporary, period, it is particularly key that equitable treatment is maintained throughout any recovery. As a result, we should expect to see more triggers and ‘upside sharing' mechanisms - to ratchet up cash when trading/conditions return to normal - being built into funding and risk management plans. Security over assets, guarantees and underwriting investment performance are other levers trustees and sponsors might look at to deliver better member security."
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Other commentators felt the regulator's position on areas such as easements for actuarial valuations made clear it expects a "return to business as usual" as soon as possible.
Isio partner Mike Smedley said: "The regulator has been sympathetic to the short-term challenges faced by employers and trustees. But the latest statement makes clear that this flexibility is temporary - and it expects a return to business as usual as soon as employers can afford.
"Despite the turmoil in markets, the statement offers no easements for actuarial valuations in the current environment, beyond the necessary constraint of employer affordability. If anything, the regulator has strengthened its statements about ensuring the pension scheme benefits from their employer's recovery and should take priority over dividends."
Smedley added: "Employers will need breathing space to recover from the crisis, and were probably hoping for some flexibility on pension funding, not stronger guidance. The difficult job of balancing the employer's recovery with pension funding will now fall to trustees - with the regulator watching closely over their shoulder."