The Pensions Regulator’s annual funding statement – it’s all about risk management

The Pensions Regulator (‘tPR’) has published its annual defined benefit funding statement, which will be particularly relevant for schemes with triennial valuations effective from 22 September 2017. 

The annual funding statement uses the language of risk management which is now being emphasised by tPR. Trustees are expected to:  

  • focus on integrated management of covenant, investment and scheme funding plans, including those risks arising from scheme maturity and levels of member transfers;
  • use risk management techniques (such as risk-attribution charts, stress tests and scenario planning exercises) - scheme size should not be a barrier to doing so;
  • make workable contingency plans, both to manage poor outcomes and upside opportunities, and document them. For instance if, in setting discount rates, the trustees assume that rates will rise above market expectations, they need to document what actions will be taken at the next valuation if this does not happen;
  • understand the employer’s business plans when agreeing the funding strategy and affordability of deficit contributions in light of shareholder distributions. The growing disparity between dividend growth and stable deficit reduction payments is a concern increasingly voiced by tPR;
  • seek appropriate advice when trustees perceive either a lack of skills on the board or a risk to objectivity from conflicts of interest; and
  • follow a project plan to leave sufficient time for advice, analysis and negotiation to keep to the 15-month valuation deadline; though tPR seemingly allows flexibility where the parties are making every effort to agree.     

tPR points out that it does not assess the appropriateness of actuarial assumptions, but judges their suitability in the risks in the funding and investment strategies and the manner in which trustees appear to manage them. 

So the way in which trustees take and evidence their decision-making is important: appearances do count.