With UK pension schemes seeing a “material” increase in their funding level, The Pensions Regulator (TPR) has said that they should reassess their long-term objectives.

According to the regulator’s annual funding statement, published today, most defined benefit (DB) schemes have seen “material” improvements in funding levels, and half of schemes are expected to have exceeded their estimated buyout funding levels.

This, TPR said, gives trustees and employers an opportunity to reassess their long-term targets and consider run-on, consolidator or insurance options.

Less than 25% of schemes are expected to have a deficit on the technical provision basis.

TPR said that trustees of such schemes need to focus on achieving a recovery plan that is as short as reasonable, based on the employer’s affordability. Trustees also need to be mindful of the employer covenant, given their higher reliance on it, TPR added.

Louise Davey

Louise Davey at TPR

Discretionary increases

For schemes with better funding, TPR recognises that trustees face a range of calls for how that funding could be put to its best use. For example, some employers are asking to reduce or suspend contributions, and members are requesting discretionary increases, the regulator pointed out.

But when considering these requests, TPR cautioned trustees to be mindful of their overall position, the resilience of their investment strategy and the level of covenant support.

It added that trustees should also consider the situation of members who would benefit from a discretionary increase, and whether their scheme has a history of making such awards.

TPR’s interim director of regulatory analysis and advice, Louise Davey, said: “Where funding levels have improved significantly, trustees should review objectives and strategies, set during a period of low interest rates, to ensure they remain in the best interests of members.

“If they are not, trustees should look to redirect some of their funding level improvements towards a funding and investment strategy that is aligned with their plans for the scheme.”

She pointed out that options range from moving to a long-term target with the potential to generate additional surplus, to entering a consolidator or insurance arrangement.

Scaled back

Laura McLaren, head of DB actuarial consulting at Hymans Robertson, said that with DB funding “holding strong” and a new funding code coming later this year, it is “not surprising” that the funding statement has been “significantly” scaled back.

Where past statements have centred on repairing deficits, she pointed out that this statement is about encouraging trustees to develop endgame strategies.

“The content echoes the shift in schemes starting to think beyond being funded on a solvency basis – as we’ve also seen reflected in the recent ‘options for DB’ consultations,” she said.

“Schemes are positioned to make decisions that could materially affect member outcomes. So it’s good that TPR is highlighting the growing range of endgame and consolidation options, and directing trustees to robustly consider the full spectrum, including alternative arrangements where appropriate,” McLaren continued.

Matthew Arends, partner and head of UK retirement policy at Aon, said that cutting the statement from 4,200 words the previous year to 1,700 words this year is to be “applauded”, but he suspects it is a reflection of it being “something of a stop gap” before the funding code comes out.

He queried: “It may place an even stronger spotlight on the question of why TPR is still implementing a new Funding Code and funding regime that will be brought in later in 2024.”

Chris Heritage, director at Cardano, agreed it is “reassuring” that the regulator is encouraging trustees to robustly assess the growing number of options available in the market.

“The Annual Funding Statement serves as a helpful reminder for trustees to proactively review their journey plan to ensure that it remains appropriate in the context of the scheme’s funding position and the latest view of covenant strength,” he said.

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