Atkin trustees, actuaries, consultants & administrators

TPR Funding Statement

TPR’s funding statement

The Pensions Regulator (TPR) has recently issued its annual funding statement (click here).

Although of relevance to all those involved with defined benefit pension schemes, the statement is primarily aimed at trustees and employers of schemes undertaking actuarial valuations with effective dates from 22 September 2012 to 21 September 2013.

The statement builds on previous TPR comments by emphasising the flexibilities within the existing funding regime, in particular in relation to the way discount rates are set and the assumptions that underpin recovery plans.  Where changes in approach are implemented, the associated risks need to be appreciated and the rationale for any change should be documented. TPR stresses the importance of an integrated view of covenant, investment and funding and again trustees should be able to evidence how this has been achieved.

When setting contribution rates, TPR expects trustees to take account of what the employer can reasonably afford. It says that “a strong and ongoing employer alongside an appropriate funding plan is the best support for a scheme. Where there is tension between the need for scheme contributions and for investment in the employer’s business, it is important that the solution found neither damages the employer’s covenant, nor benefits other stakeholders at the expense of the scheme”. This is consistent with TPR’s new statutory objective (expected to be introduced formally during 2014) of ensuring that funding arrangements are compatible with sustainable employer growth.

Finally, TPR is moving away from formal triggers based on individual items (e.g. 10 year recovery plans).  Instead, it will focus more on factors such as:

- whether the recovery plan and investment risk present are appropriate given the strength of the employer and the affordability of contributions-any

- specific issues relating to a deterioration in the employer covenant strength or possible avoidance

- the shape of recovery plans, including initial low levels of contributions

- the investment return assumed in the recovery plan

- any significant issues that TPR had with previous valuations.

In practice, these factors have been key drivers for TPR intervention for some time.

Atkin comment:

We welcome TPR’s statement. Although it contains no real surprises, by bringing together and formalising previous TPR comments and existing practice it gives trustees and employers a clearer framework in which to carry out future funding negotiations. TPR recognises that there is often a fine line to tread when balancing the need for additional scheme contributions versus the alternative of investing in the employer’s business and it highlights some of the flexibilities in the funding regime that can help manage this balancing act.

TPR knows the position is challenging for many schemes and it will be understanding of this when reviewing valuation submissions. However, tough conditions mean it is more important than ever for trustees and employers to understand the risks associated with their funding plan and TPR will expect to see a coherent approach that takes proper account of the interactions between funding, employer covenant and investment strategy. In our experience, such an approach is best developed through open and honest dialogue between trustees, employers and advisers.

If you have any questions in relation to TPR, either in relation to the statement or more generally, please contact your usual Atkin consultant or Steven Wilkinson (020 7002 7626, steven.wilkinson@atkin.uk.com).

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