TPR Publishes Its 2024 Annual Funding Statement – Retirement, Superannuation & Pensions

The Pensions Regulator has published its 2024 Annual Funding
Statement, which is relevant to trustees and sponsors of all
private sector DB pension schemes.

On 24 April 2024, The Pensions Regulator (TPR) published its
latest Annual Funding Statement, which is relevant to
trustees and sponsors of all private sector defined benefit (DB)
pension schemes, but particularly applies to those undertaking an
actuarial valuation with an effective date between 22 September
2023 and 21 September 2024 (referred to as ‘Tranche 19’
valuations) or reviewing funding and investment strategies.

As TPR reminds trustees and sponsors, the current funding regime
applies until the new legislation and the revised DB funding code
come into force for valuations with an effective date on or after
22 September 2024. TPR notes however that it would be good practice
for trustees to consider the steps they can take now to align with
the new funding code, to avoid having to make significant changes
at their next valuation.

Context for the statement

TPR notes that the aggregate funding level across schemes with a
Tranche 19 valuation is ahead of that expected three years ago,
with TPR estimating that half of these schemes are expected to be
funded to a level at which they could afford to secure all
liabilities with an insurer through a buyout (although as we have
previously noted, TPR’s assessment of the
aggregate surplus across all DB schemes might be an overestimate).
However, the position for individual schemes will vary greatly.

If a scheme’s funding level has improved significantly,
trustees should review whether their funding and investment
strategies are still appropriate. In particular, TPR suggests that
trustees should consider whether continuing with their existing
strategy is in members’ interests.

TPR acknowledges that trustees are increasingly facing calls
from employers to reduce or suspend contributions and from members
calling for discretionary increases. When considering any such
requests, trustees should look at the scheme’s overall
position, the resilience of the investment strategy and the level
of covenant support.

TPR also highlights that economic uncertainty will continue to
affect schemes and sponsors, including the future path of interest
and inflation rates, geopolitical instability, and the potential
effects of climate change and wider sustainability issues. TPR
expects schemes to consider these factors when assessing and
monitoring their funding and risk strategies, and their sponsor
covenant.

Funding considerations

TPR continues to group schemes broadly into three categories
depending on their funding level relative to both the cost of an
insurance company buyout and the scheme’s technical provisions
and provides specific guidance for each group. The key messages
are:

• For schemes that are fully funded on a buyout basis, trustees
  should consider whether buying out or running on is the best option
  for members, taking into account the risks and benefits of each
  option, the scheme rules, and the trustee duties. TPR also notes
  that that the effect of a buyout on the possibility of future
  discretionary benefit increases may be a relevant consideration.
  Trustees should document their strategy and explain why it is in
  the best interest of members.




• For schemes that are funded to a level above technical
  provisions but below the cost of a buyout, trustees should review
  their long-term objective and the timescale for reaching it.
  Trustees should also review their plans for transitioning their
  investment strategy to align with their long-term objectives,
  taking into account how the funding position of the scheme has
  changed since the plans were originally set. Trustees should also
  consider the merits of running on the scheme versus aiming for
  buyout and explore the full range of options available to them,
  including emerging options such as commercial consolidators,
  capital-backed journey plans or the proposed consolidator that
  would be run by the Pension Protection Fund and underwritten by
  taxpayers (though key details of this are yet to be determined).
  TPR also suggests that schemes in this group may want to explore
  ways of achieving greater levels of governance and economies of
  scale and whether greater value can be delivered to members though
  increasing access to private market investments.




• For schemes that have a deficit on a technical provisions
  basis, trustees should focus on eliminating the funding deficit as
  soon as the employer can reasonably afford, and revisit the
  technical provisions to ensure they are consistent with the
  scheme’s long-term funding target. Trustees should also pay
  careful attention to the employer covenant and to be mindful of
  re-financing risks, covenant leakage and fair treatment.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.