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Pensions Regulator’s funding statement reflects 'brave new world' of DB scheme funding

Pensions & benefits Policy & regulation

Today, the Pensions Regulator (TPR) issued its 2024 Annual Funding Statement. This is expected to be the last such Statement under the current funding regime, with the new funding regime due to apply to valuation dates from 22 September 2024.

The content is an evolution from last year’s Statement, with the familiar theme of integrated risk management at its core.

However, there are some areas worth highlighting, including:

  • A focus on materially improved funding levels, including an estimate that half of schemes are now in surplus on a buyout basis.
  • Helpful increased emphasis on the benefits of considering the full range of end-game options, including buyout, run-on, or other consolidation options (with the public sector consolidator getting a specific mention). Certain schemes are also encouraged to explore options “to achieve greater levels of governance and economies of scale”. TPR also trail that they expect to publish guidance on DB alternative arrangements for consolidation later this year.
  • Increased reference to climate risk, geopolitical instability, sustainability, and other ESG considerations and their importance, including when thinking about longer term strategy, and encouragement for trustees to consider sustainability when selecting an insurer.
  • Some notable mentions of discretionary pension increases, including a statement that the impact of a buyout on the possibility of such increases may be a relevant consideration.

Commenting, LCP Partner Richard Soldan said: “The Regulator’s funding statement reflects the “brave new world” of DB scheme funding. The increased emphasis on the benefits of considering the full range of end-game options is spot on. The encouragement for trustees to review their strategy reflects the much-improved funding positions that many schemes are seeing – perhaps the most striking part of the Statement is TPR’s estimate that half of the schemes now have a surplus on a buyout basis. Given these developments, it must make sense for trustees and employers to review their strategy now if they haven’t done so recently.”

LCP Partner Jon Forsyth added: “It’s really interesting to see the Regulator’s greater emphasis on broader systemic risks, such as climate risks, geopolitical uncertainty and sustainability, the latter particularly when considering insurance options. We’re finding trustees are increasingly interested in exploring the potential impact of these systemic challenges, and, having taken the step back to consider these issues, are making different decisions as a result.”

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