The Pensions Regulator (TPR) has today urged schemes to be alert to volatile investments and funding positions during the current economic climate.
Its Annual Funding Statement (AFS) 2022 explains how trustees will be approaching their triennial valuations at a time of high inflation and energy prices, higher interest rates and slower economic growth – all of which may impact the scheme’s assets and liabilities, as well employer covenants.
Schemes are also urged to be alert to changes in liquidity demands and cyber risks following the conflict in Ukraine, with the longer-term impact on funding positions potentially “significant”.
Furthermore, the AFS highlights how employer covenants may be affected by indirect impacts on their customer base, supply chain or financing costs.
With the longer-term impact of COVID-9 on mortality trends still uncertain, the regulator is calling on schemes to manage these various challenges within an integrated risk framework, and an open dialogue with employers when assessing a covenant.
David Fairs, TPR’s executive director of regulatory policy, said: “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.
“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.
“An actuarial valuation is an opportunity for trustees to review their funding plans and it may be a good time to seek future protections such as contingency plans and dividend-sharing mechanisms.”
Where employers are experiencing short-term affordability constraints, the AFS urges trustees to carefully consider any requests to accept a temporary reduction in deficit repair contributions.
TPR expects any such request to be short term, with higher contributions in subsequent years limiting any extension to recovery plan end dates, and will continue to view shareholder distributions as being inconsistent with the scheme receiving lower contributions.
When considering the impact of Covid on life expectancy, the regulator has stated that any adjustment reducing benefits costs by more than 2% will require “strong evidence”.
Dan Auton, head of demographics at XPS Pensions Group, commented: “Whilst a 2% reduction in liabilities is slightly below the average best estimate impact we are seeing across schemes – our best estimate range is 1.5-3.0% – we support the view that a reduction in liabilities should be based on robust analysis as the impact can vary greatly between schemes.
“TPR also focusses on scenario planning as part of valuations and it is now possible to include analysis on the impact of the pandemic in different scenarios within wider investment scenarios to give a full picture of how schemes may be affected by the current climate.”
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Author: Chris Seekings