LCP has called for urgent clarity from The Pensions Regulator (TPR) on defined benefit (DB) funding in light of the coronavirus crisis, in particular in relation to the impact on the viability of sponsoring companies.
Fellow consultancy Aon has said “pragmatism” was needed from TPR with regard to difficult 2020 valuations.
Deficits for FTSE 350 company schemes have risen by an estimated £40bn (€42.7bn) so far in Q1 2020, Aon said, with pension scheme sponsors and trustees facing difficult 2020 funding valuations.
At LCP, partner Steven Taylor said the most pressing issue for DB schemes was the potentially significant impact of the crisis on the viability of sponsoring employers.
“In past crises, the system has shown flexibility, with sponsors able to adjust recovery plans to deal with short-term pressures,” he said.
“We now need companies and trustees to work together to come up with plans that help the company to survive whilst retaining a credible approach to pension scheme funding, and provide appropriate protection for scheme members.
“Urgent clarity from TPR would be welcome to help trustees and schemes understand their option and how the regulator is likely to respond,” said Taylor.
At the time of the 2008 financial crisis, some employers used flexibilities in the funding regime, such as to extend recovery plans, to improve their cashflow.
One of TPR’s statutory duties is to have regard to the “sustainable growth of the sponsoring employer”.
According to Aon, around 15% of UK schemes having a valuation date of 31 March 2020 or 6 April 2020, which meant their valuations would be driven by the prevailing market conditions – potentially an “atypical day” on the financial markets given current levels of volatility.
If no action was taken now, this potentially atypical point could lead to more difficult valuation negotiations and additional pressure on UK companies just when this was not needed, the consultancy added.
Dutch pension schemes have already seen funding ratios drop to levels only seen soon after the last financial crisis in 2019.
Lynda Whitney, partner at Aon, said: “There are plenty of levers that can be used within the legislative framework for valuations – but ultimately it’s a matter of sponsors and trustees having a grown-up conversation – preferably ahead of the end of March.”
An example of one such “lever” is considering recovery plan structures that contain a step-up in deficit contributions in recognition of short-term affordability constraints
Whitney added: “This will be a really tricky round of valuations at a time when we do not know if the impact of current events on individual companies or the financial markets is short-term or long-term – and we are all trying to meet long-term pension promises.”
“This will be a really tricky round of valuations at a time when we do not know if the impact of current events on individual companies or the financial markets is short-term or long-term”
Lynda Whitney, partner at Aon
Matthew Arends, head of UK retirement policy at Aon, said: “Given the levels of volatility we are seeing in asset values, we call on TPR to be pragmatic when reviewing 2020 valuations.”
He said the regulator also needs to be clear in the 2020 Annual Funding Statement that “latitude is available within the funding regime and that it can be used by trustees and sponsors to reach reasonable valuation outcomes, and that pragmatic amendments to existing recovery plans are acceptable if the sponsor has short-term affordability constraints”.
These volatile market conditions, Arends said, also challenge TPR’s plans for a more heavily prescribed “fast track” approach to compliance, as appeared in its recent funding code consultation.