The Pensions Regulator (TPR) in the UK is calling on trustees to consider alternative funding and investment strategies that reduce longer-term covenant reliance.

It called for this in its Annual Funding Statement 2022 published today – a statement for trustees and sponsoring employers of occupational defined benefit (DB) pension schemes with valuation dates between 22 September 2021 and 21 September 2022 (known as Tranche 17, or T17 valuations).

In the statement the Regulator highlighted an economic scenario of high inflation, high energy prices, higher interest rates and slower economic growth – all of which may have an impact on pension schemes’ funding and employer covenant.

Three significant events are also called out – the conflict in Ukraine, COVID-19-related disruption and the impact of Brexit.

The Regulator points to the importance of assessing how current market events are shaping the employer covenant and urges trustees to consider their long-term funding target (LTFT) and their journey towards it.

The statement said: “Trustees should remain alert to their scheme’s funding positions and covenant changing very quickly – especially in the current environment. It is important to understand key risks to their scheme and the effectiveness of their strategies to manage them.”

It added: “These risks are often connected by the same underlying factors (for example inflation, interest rates or climate risks), so trustees should consider their impact on the scheme and the employer’s covenant in an integrated way.”

Schemes in surplus

TPR stressed that as many schemes become better funded and aim towards their LTFT or other end-game strategies, regular monitoring and contingency plans remain as important as ever to enable schemes to progress towards their goals.

The Regulator noted that where schemes have recently achieved full funding (on their technical provisions basis) – or are expected to do so soon – trustees should consider how their liquidity needs will change in the absence of employer contributions and organise their investments accordingly.

Trustees should also remain focused on their LTFT focusing on managing risks through suitable contingency planning. Such plans may include contingent funding contributions linked to suitable funding and risk triggers.

Similar plans should also help to address concerns from employers about trapped surplus, it said.

Katie Lightstone, pensions partner at PwC, said: “The Regulator has reminded trustees that the question of covenant doesn’t go away once a scheme is in surplus. As more schemes reach full funding, it will be important that trustees understand the longer term outlook for covenant given their continued exposure until schemes are run off or bought out.”

She said that a big challenge for trustees assessing their covenant is that recent financial performance during the pandemic in many cases isn’t a good indicator of future performance. “TPR’s focus on reviewing forecasts is helpful but given the level of market uncertainty it will be important for trustees to review sensitivities, particularly around inflation and energy prices, and potential downside scenarios,” she added.

Leah Evans, associate partner at EY Parthenon, agreed that the increase in funding levels experienced by many schemes, coupled with favourable insurance pricing, means now is a good time for trustees and sponsors to review their journey plans and assess whether securing members’ benefits through a bulk annuity might now be in reach.

“For schemes that have yet to consider their long-term objectives, now is the time to begin”

Graham Newman, scheme actuary at Spence & Partners

“However, while the overall funding level trend has been positive, there will also be many schemes where funding levels remain low. In these cases, it is perhaps even more important that trustees and sponsors work together to find the strategy that works best for both scheme and sponsor,” she explained.

“Continued innovation in the market, for instance, on the option of a superfund transaction, will help schemes that may be less well funded or have concerns over covenant to find a way of securing their members’ benefits,” she added.

Consultancy Spence & Partners, however, believes that in the medium to longer term, with the new funding code on the horizon and TPR recommending schemes adopt a specific long-term strategy designed to deliver an agreed long-term objective, trustees and sponsors should be encouraged to work on their data cleansing, governance and investment strategy de-risking.

“For schemes that have yet to consider their long-term objectives, now is the time to begin”, said Graham Newman, a scheme actuary at the firm.


TPR recognises there are still differing views on the impact from the COVID-19 pandemic on mortality for pension schemes.

The immediate impact from actual mortality experience over the period to a scheme’s valuation date will be accounted for in the valuation data, but there remain divergent opinions among market participants on the impact of COVID-19 on the course of future longevity improvements, which are hugely uncertain, the statement noted.

When using the latest base mortality tables and projections available, suitably adjusted for scheme specific factors where appropriate, the Regulator claimed that consideration will be needed on the weighting given to recent data.

The Continuous Mortality Investigation model enables schemes to choose the weighting applied to the data for 2020 and 2021, although their core model disregards the data for both years.

Although there is more data now compared to last year, it needs to be interpreted with care. “We remain of the opinion that the long-term impacts from COVID-19 will take more time to become apparent. But where trustees feel that changes to their mortality assumptions at this stage are appropriate and justifiable, we expect any reduction in liabilities due to such changes to be no more than 2%, unless accompanied by strong supporting evidence,” TPR said in the statement.

“Stronger employers can pay dividends if they have recovery plans of less than five years, weaker employers should not be paying dividends in excess of deficit payments and the weakest sponsors should not be being dividends at all,” Mike Smedley, partner at Isio, said in relation to on how deficit payments should compare to dividends.

“There are likely to be some difficult conversations for those sponsors who are significantly impacted by some or all of the worry-list items,” he said.

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