Pensions Regulator issues Annual Funding Statement
The Annual Funding Statement for 2019 is particularly relevant to trustees and employers with valuation dates falling between 22 September 2018 and 21 September 2019. However, several aspects of the Statement are likely to be relevant to all trustees and employers of defined benefit (DB) schemes and may well feature in the revised DB Funding Code (due out in draft this Summer).
The Pensions Regulator (the Regulator) notes in its Statement that it has observed good practice among schemes which seek to set long-term funding targets (LTFTs) and states that it now expects all schemes to follow similar practices and set LTFTs in the future. Trustees have been told that they should then be able to evidence how their shorter-term investment and funding strategies are aligned with the LTFT that has been set. When setting their strategies, the Regulator also urges trustees to focus on scheme maturity, given that the majority of schemes are now closed to new members. A large section of the Statement then contains various tables setting out the Regulator's expectations for key risks and actions for trustees to be aware of, categorised according to a combination of schemes' covenant strength, funding position and investment profile.
Further points raised in the Statement include parameters that are likely to be acceptable to the Regulator in relation to the level of dividend payments distributed by employers (which will depend on factors such as the level of deficit repair contributions owing to the pension scheme, the relevant scheme's recovery plan length and the employer's covenant position) and related commentary that the Regulator is intending to continue with its current interventionist approach of questioning trustees and employers about dividend payments (regardless of a scheme's employer covenant strength).
Finally, the Regulator notes in its Statement that it will be engaging with schemes ahead of 2019 valuations where it considers their existing recovery plans to be unacceptably long (the Regulator states in another section of the Statement that the median recovery plan length is 7 years, but that schemes with strong employer covenants would be expected to have recovery plan lengths which are "significantly shorter" than this).