Current Issues in the Pensions Industry. May 2023

TPR – Annual Funding Statement 2023:   TPRs annual funding statement is primarily aimed at schemes with valuation dates between 22^nd September 2022 and 21^st September 2023, but is also relevant for schemes reviewing their funding or risk strategies.    Funding positions have improved for many schemes, with around 25% likely to be in a position to be able to ‘buy-out’ with an insurance company.  TPR expects trustees to set a ‘long-term funding target’ (LTFT) as a priority.  Where schemes are expected to be funded at ‘buy-out’ level, TPR warns that capacity issues in the insurance market may mean that trustees have to consider different options to protect the funding position until such time as it is possible to get a transactable quote.   Annual Funding Statement 2023

LDI – TPR publishes guidance:   TPR has now issued guidance for trustees on the use of LDI.  Entitled ‘Using leveraged liability-driven investment’ the guidance can be found here:  TPR LDI Guidance  When investing in LDI, TPR expects trustees to consider matters such as collateral buffers, testing for resilience, governance of the arrangements, and monitoring.  Following the extreme movement in gilt yields late in 2022 and the difficulties that some schemes faced in meeting large, and frequent collateral calls, TPR wishes to eliminate the difficulties faced, which ultimately lead to the Bank of England stepping in.   TPR expects trustees to consider the liquidity necessary to manage day-to-day volatility in the market (operational buffer), as well as the additional liquidity that may be required during severe market stress (market stress buffer).  TPR says that the market stress buffer should be a minimum of 250 basis points.

Institute for Fiscal Studies – Major review of pensions urged:   The IFS has issued a report entitled ‘The Challenges for the UK Pension System: the case for a Pensions Review’.  Noting that in the private sector, a majority of middle earners contribute less than 8% of earnings to their pension and that almost 90% are saving less than the 15% which the Pensions Commission believes that savers should contribute to their pension, the IFS believes that a review of the pension system is needed to ensure future pensioners have an adequate standard of living.

Engaging with TPR when the sponsor is struggling:   In a blog that highlights the experience of the Arcadia Group pension schemes, TPR encourages trustees to contact them and the PPF at an early stage if the sponsor appears to be heading towards difficulty.  TPR states that it is important for  trustees to be given comprehensive financial information on a regular basis with forward looking forecasts.  Where it becomes clear that trading for the sponsor is challenged, or when the viability of the company is uncertain, TPR expects trustees to engage with them.  They highlight their involvement in the CVAs of Arcadia Group Ltd, and its subsidiaries, and how this helped to protect the pension savings of thousands of members.  The blog can be found here:  TPR Blog – Trustee engagement

DB Funding Regime – Now expected in 2024:   In our last newsletter, we reported that the new DB funding code, which was expected to come into force from October this year, had been pushed back.  In its Corporate Plan for 2023/24, TPR has now made clear that the new regime is intended to launch in April 2024.  TPR has also said it will look to publish guidance on models of DB consolidation that are different to superfunds.  In the longer term, TPR will also look at the feasibility of requiring a professional trustee to sit on every trustee board. 

Overseas Transfers – FCA Warning:  The Financial Conduct Authority is concerned that overseas financial advisers are targeting ex-pat members of UK DB schemes.  It is concerned that UK based financial advisers who must provide ‘appropriate advice’ for UK transfers of £30,000 or above, are not considering all the factors necessary to protect the interests of the pension scheme member.  The FCA has issued guidance for UK IFAs on due diligence and harm prevention.