Consulting Actuaries

Reality bites! Has TPR signalled its support for sustainable growth?

Royal London Consulting Actuaries

17 May 2013

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Download the TPR annual statement (PDF).

The Pensions Regulator (TPR) has just published its second annual statement on defined benefit (DB) funding.

With the new additional objective of supporting sustainable growth for sponsors of DB schemes to be formalised later this year, have the discussions around TPR's inflexibility resulted in any relaxations for this year's valuations?

Stress on existing flexibilities

Perhaps stung by the criticisms of inflexibility, TPR's statement (which is aimed at DB trustees and sponsors) highlights the 'flexibilities' available to trustees when agreeing scheme liabilities and future contributions.

TPR has accepted that economic circumstances may limit the ability of sponsors to continue paying contributions at current levels.

Reassuringly, it is noted that a strong and ongoing employer is the best support for a scheme and that contributions should be tailored to the scheme and employer's circumstances, with account being taken of "what is reasonably affordable for the employer".

What are trustees advised to do?

This pragmatic, realistic tone is certainly a welcome change since last year's DB statement, which attempted to guide how deficit contributions might need to change.

Instead, trustees are reminded to:

  • Consider whether current contributions can be maintained. Agreed contributions should not damage the sponsor covenant, but equally other stakeholders should not benefit at the expense of the scheme. In a throwback to language used in the early days of TPR, discussions on contribution levels should reflect the 'scheme's status as a creditor to the employer'.

  • Focus on the link between sponsor covenant, the scheme's investment strategy, and the appropriate level of prudence incorporated in the discount rates compared against expected investment returns. Trustees who demonstrate good governance and have a sound risk management approach are already likely to be considering these inter-related issues together. It is noted that contingent assets might help in mitigating some of the risks inherent in any relative reduction in contributions from the sponsor.

  • Document the reasons for adopting any course of action.

  • Ensure that discount rates for setting technical provisions are prudent and allow for anticipated future returns on scheme assets or yields on government bonds. However, TPR acknowledges that the assumptions for the relative returns on different asset classes may differ from previous valuations to reflect changes in market conditions and the outlook for future returns. TPR also comments that pension accounting figures (FRS17, IAS19) are unlikely to be a good indicator of prudence.

Possible outcomes

Given the focus of TPR’s statement, we might expect to see greater use being made of the flexibilities available in setting contributions rates than before. Thus we might see more optimistic assumptions in Recovery Plans (RPs), longer RPs, or just more flexibly designed affordable contributions.

A new suite of risk indicators

In another welcome move, there is a clear shift away from the previous 'triggers' approach to regulation - for example, there is no longer any '10-year' RP trigger.

Instead, a suite of risk indicators will be used, including:

  • Are investment risks and RP contributions consistent with affordability and the relative strength of the sponsor?

  • Has there been a deterioration in the sponsor covenant or is there a risk of 'avoidance'?

  • Is the RP too back-end loaded or is assumed investment performance too optimistic?

  • Were there significant issues with previous valuations?

So, maybe TPR has reacted in a positive way to the criticisms levelled at it. Time will tell.

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