11 March 2019

Annual funding statement

In the 2019 edition of its Annual Funding Statement, the Pensions Regulator (TPR) sets out its expectations about how trustees and sponsoring employers of a Defined Benefit Pension scheme (DB scheme) will manage the funding of their scheme. 

A significant development is TPR’s key expectation that all schemes should adopt a long-term funding target (LTFT). This was anticipated in the White Paper of March 2018 where the government indicated that it planned to legislate for all schemes to adopt such a target.

We welcome TPR’s recognition of how LTFTs (including their flexibility) can help schemes to deliver benefits to those entitled to them. For many schemes and employers the LTFT will be a natural transition from their current funding plan; indeed we have seen a number of schemes start to move towards longer term targets within the current regime.

Whilst we see LTFTs as an overall positive development, there may be a significant number of schemes where an additional target could prove challenging for the scheme and its employer. For this reason the relationship between TPR’s expectations over LTFTs and the current flexible legislation on scheme funding (set out in the Pensions Act 2004) will in our view be important. For example, how will LTFTs alter or supplement the current funding regime and will flexibility continue to exist to the same extent within scheme specific funding (and also will it play a part with LTFTs).

As a practical matter only when legislation requiring schemes to adopt LTFTs and, crucially, defining the concept, will schemes have the confidence to begin serious planning for LTFTs. Meanwhile there may be uncertainty as to how to view and respond to any expectations of TPR’s that may not be clearly backed by the 2004 Act.

The tables

If the tables setting out key risks for trustees and employers to focus on and actions to take represent sketch of what a LTFT would look like, we see advantages in these having a statutory footing rather than resting in the expectations of TPR. For example, if there are requirements in practice for parties to provide notifications or turn to covenant assessors, a clear statutory requirement may help trustees ensure these are carried out.

Equitable treatment

TPR mentions that it expects to see the pension scheme treated equitably with other stakeholders explaining that it remains concerned about the disparity between dividend growth and stable Deficit Reduction Contributions (DRCs), and other forms of covenant leakage. It also notes that it will continue to focus on equitable treatment for the pension scheme in 2019.

TPR bases its interest here in the principles that where dividends and other shareholder distributions exceed DRCs, it expects to see a strong funding target and relatively short recovery plan.

If the employer is tending to weak or weak, it expects DRCs to be larger than shareholder distributions unless the recovery plan is short and the funding target strong. We see the logic in this. However there may be times when payments to stakeholders are required in order to maintain staff or to compete effectively, for example in professional services firms. Accordingly we would again propose that TPR’s tables in respect of covenant gradings and proposed actions by trustees and employers maintain a significant degree of flexibility.

 For more information please contact our pensions team or your usual Burges Salmon contact.

Key contact

Clive Pugh

Clive Pugh Partner

  • Pensions Regulatory
  • Pensions Services
  • Pensions Legal Advice 

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