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TPR Annual funding statement – new risks emerging, but ‘normal service resuming’ when it comes to Regulator expectations

Pensions & benefits Policy & regulation

The Pensions Regulator (TPR) has today published its 2022 Annual Funding Statement.

It continues to emphasise TPR’s expectation of joined up strategic journey planning and that trustees will seek extra protections from sponsors where appropriate, as well as reminding the industry that the new funding regime is on the horizon.

Other key points to note are:

  • Unusually, TPR has given specific guidance around adjustments that might be made for post-pandemic longevity assumptions, stating that they would not normally expect to see reductions in longevity arising from Covid considerations to be more than 2%
  • While the key “tables” that set out TPR’s expectations for different schemes are nearly identical to those in their 2021 statement, one notable difference is reference to a 6 year rather than 7-year recovery plan length as a measure of the quality of funding strategy.
  • TPR has reiterated guidance it first gave in 2019 (pre pandemic) about the expectations of the relative size of pension contributions to dividends (and other shareholder distributions)
  • There are hints that the new funding regime will include more detailed expectations around assessing the value of a sponsor’s covenant support.

TPR has explicitly mentioned many of the key risks of the world we currently live in, and their expectations that trustees consider at least the following risks when considering valuations, and when developing and reviewing their journey plans: the conflict in Ukraine, the pandemic, Brexit implications, climate change, high inflation, higher interest rates, and the general threat of a weaker economy.

Jon Forsyth, Partner at LCP, added: “This year’s Annual funding statement is very much evolution rather than revolution, and while there is reference made to the current big issues the world is facing and how these risks should be considered by schemes, there is also an element of normal service resuming when it comes to industry and TPR expectations post pandemic. The Regulator is reverting to its slightly harder line around the expectations of fair treatment regarding size of pension contributions versus dividends, compared to its position during the pandemic, and there are more references to shorter 6-year recovery plans.

“The timetable for the much-awaited consultation on the new DB Code is still ‘later in 2022’. For the time being, the current regime applies, and we don’t expect the new regime to apply until valuations later in 2023, but we do expect trustees and sponsors will increasingly have one eye on the expectations of the new regime especially once more detail is known.”

On issues around mortality, Steven Taylor, Partner at LCP, commented: “It’s clear that the long-term impact of Covid-19 will take years to understand but this isn’t unusual in the context of other assumptions made by trustees, such as around inflation. There is now significant scheme and national level data to help trustees and sponsors form views on the potential longer-term impact of Covid-19 and TPR has now indicated for the first time that liability reductions of up to 2% may be justifiable if properly supported.

“For many schemes, this means that understanding the impact of Covid-19 could have a significant impact on funding requirements at upcoming valuations and could also feed into contingent funding mechanisms that are designed to reflect areas of uncertainty. For example, our research for FTSE100 companies shows that a 1-2% fall in liabilities might correspond to around a £1bn p.a. reduction in annual contribution requirements, if supported by appropriate contingency arrangements.”

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