- The Pension Regulator’s (TPR) 2023 Annual Funding Statement estimates around a quarter of schemes could buy-out.
TPR’s new Annual Funding Statement (AFS) 2023 is published today (27 April 2023) and clearly sets out what TPR expects from schemes depending on their liabilities, funding strength and covenant support.
The funding positions of defined benefit (DB) pensions schemes have improved in general but there is variation between schemes and future funding challenges remains uncertain.
TPR estimates around a quarter of all DB schemes may have sufficient funds to buy out their liabilities with insurance companies. Trustees of those schemes will need to consider if their long-term targets remain appropriate, whether that is to buy out, or to examine other endgame options.
The majority of remaining schemes are estimated to have funding positions that are ahead of their funding plans. In these cases, trustees should consider whether the existing strategy and level of risk is in the best interests of members. If not, this may be a trigger for trustees to review their pace of funding and level of risk, or to re-order their long-term targets and set new, more ambitious objectives.
Funding levels will have fallen for a small number of schemes, including some invested in pooled funds and others unable to meet the necessary liability-driven investment (LDI) collateral calls when gilt yields spiked in 2022.
The AFS explains how they will need to reset funding and investment strategies to reach their long-term targets and should review their operational governance processes to ensure future resilience. Trustees, their investment managers and advisers should read TPR’s latest LDI guidance for more information. The level of risk that trustees decide to build into their scheme’s funding and investment strategies should be supportable by the employer.
Lou Davey, TPR’s interim Director of Regulatory Policy, Analysis and Advice, said: “For the first time in many years, our 2023 AFS highlights how most DB pension schemes are ahead of their funding target. Long-term targets, and associated funding and investment strategies set in an era of low interest rates, should be reviewed. Despite improved funding levels, uncertainty remains, and economic challenges persist and so schemes should not be complacent about covenant assessments.
“The level of risk that trustees decide to build into their scheme’s funding and investment strategies should align with the level of support the employer can provide.”
The current DB funding regime applies until new regulations and TPR’s revised DB code come into force in April 2024.
TPR’s analysis supporting the AFS will be published shortly.
Notes for editors
- The AFS is for trustees and sponsoring employers of defined benefit (DB) occupational pension schemes. It is particularly relevant to schemes with valuation dates between 22 September 2022 and 21 September 2023 (Tranche 18, or T1 valuations), as well as schemes undergoing significant changes that require a review of their funding and risk strategies.
- The T18 valuations are spread over dates between September 2022 and September 2023. Approximately 25% take place at dates around 31 December 2022, and a little over 50% take place at or near 31 March 2023. 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).
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