Trustees of defined benefit schemes should consider seeking future protections such as contingency plans and dividend-sharing mechanisms given a changing economic environment and a pick-up in dividends, the Pensions Regulator has said. In its latest Annual Funding Statement it also reminded trustees to keep an open dialogue with employers. 

 

TPR said it has seen an increase in employers returning cash to shareholders by restarting dividends, paying ‘special’ dividends and share buybacks following the pandemic. In its Annual Funding Statement (AFS) 2022, published on Wednesday, it also noted that schemes in deficit should focus on recovering that deficit. TPR said it will continue to view shareholder distributions as being inconsistent with the scheme receiving lower contributions. 

 

The rapidly cooling economic environment, in part driven by the war in Ukraine, was however top on its to-do list for trustees, as the regulator pointed to high inflation, high energy prices, higher interest rates and slower economic growth, noting that as well as impacting covenant, these also affect a scheme’s assets and liabilities.  

 

The regulator said it was unclear how the conflict in Ukraine and the sanctions imposed will affect UK schemes but warned of a potentially “significant” longer term impact on funding positions from the economy. It also urged schemes to prepare for changes in liquidity demands and cyber risks. 

 

“Favourable investment conditions over the last three years mean that many schemes’ funding levels are ahead of plan, but now is not the time for complacency,” said TPR’s executive director of regulatory policy David Fairs. “Conditions remain challenging for some schemes and employers and so we urge trustees to continue to focus on their long-term funding target and strategy.” 

 

He said an actuarial valuation was an opportunity for trustees to review their funding plans and seek future protections such as contingency plans and dividend-sharing mechanisms. 

 

Patrick Bloomfield, chair of the Association of Consulting Actuaries, said this year's Funding Statement marked "a subtle but important" shift in focus for TPR and UK schemes. 
 
"Where past messaging has centred on repaying deficits, this year’s statement speaks to schemes who’ve reached full-funding and are on track.  It's helpful to see TPR call this out, encouraging trustees’ forward-thinking on long-term funding targets, journey plans and contingencies," he said.

 

He said it was "hard not to grumble that TPR’s new code of practice on scheme funding is taking some time to come to fruition, but we understand the need to be patient", given the pandemic and Brexit pressures that TPR was dealing with in recent years, "not to mention the colossal agenda of regulatory change".

Others also praised the AFS for highlighting the covenant challenges that might lie ahead.

 

“The Annual Funding Statement... very clearly, and sensibly, highlights that covenant challenges are at the forefront for pension schemes given the current environment," said  Emily Goodridge, managing director at Cardano Advisory. Even as scheme funding levels improve, trustees should think about long term covenant risks and plausible downside scenarios, she added.