On 24 April 2024, The Pensions Regulator (TPR) published its latest Annual Funding Statement, which is relevant to trustees and sponsors of all private sector defined benefit (DB) pension schemes, but particularly applies to those undertaking an actuarial valuation with an effective date between 22 September 2023 and 21 September 2024 (referred to as ‘Tranche 19’ valuations) or reviewing funding and investment strategies.
As TPR reminds trustees and sponsors, the current funding regime applies until the new legislation and the revised DB funding code come into force for valuations with an effective date on or after 22 September 2024. TPR notes however that it would be good practice for trustees to consider the steps they can take now to align with the new funding code, to avoid having to make significant changes at their next valuation.
TPR notes that the aggregate funding level across schemes with a Tranche 19 valuation is ahead of that expected three years ago, with TPR estimating that half of these schemes are expected to be funded to a level at which they could afford to secure all liabilities with an insurer through a buyout (although as we have previously noted, TPR’s assessment of the aggregate surplus across all DB schemes might be an overestimate). However, the position for individual schemes will vary greatly.
If a scheme’s funding level has improved significantly, trustees should review whether their funding and investment strategies are still appropriate. In particular, TPR suggests that trustees should consider whether continuing with their existing strategy is in members’ interests.
TPR acknowledges that trustees are increasingly facing calls from employers to reduce or suspend contributions and from members calling for discretionary increases. When considering any such requests, trustees should look at the scheme’s overall position, the resilience of the investment strategy and the level of covenant support.
TPR also highlights that economic uncertainty will continue to affect schemes and sponsors, including the future path of interest and inflation rates, geopolitical instability, and the potential effects of climate change and wider sustainability issues. TPR expects schemes to consider these factors when assessing and monitoring their funding and risk strategies, and their sponsor covenant.
TPR continues to group schemes broadly into three categories depending on their funding level relative to both the cost of an insurance company buyout and the scheme’s technical provisions and provides specific guidance for each group. The key messages are:
