The Pensions Regulator has published an annual DB funding statement that is their snapshot of the state of funding of the 5000 or so remaining schemes in the PPF 7800.
Buy-out is going well, consolidation not so, but the general view is optimistic, many schemes that had given up on paying pensions are now actively considering what it would mean to “run on” and many sponsors are looking at pension schemes as an asset again. Reading Stephanie Hawthorne’s article on end-game solutions or reactions to the DB funding statement suggests that there is considerably more support for schemes paying pensions than was imagined even a year ago.
Rethinking strategies
In last year’s statement, the Pensions Regulator grouped schemes broadly into three categories.
- Funding level is at or above buy-out.
- Funding level is above technical provisions but below buy-out.
- Funding level is below technical provisions.
They are rolling on with this
For those in group one , TPR state
Schemes in this group currently have the main options of buying out or running on. Consolidation might be an option subject to gateway tests.
I take this as an acknowledgement that superfunds are able to swim in a wider pool, but that capacity for consolidation is rather less than anticipated. Run on or consolidation is now framed as a bridge to buy-out, a rather less ambitious vision than that of the 2018 consultation.
Given constraints in the insurance market, some schemes may adopt a strategy to run on in the short to medium term, and buy-out when specific targets are met, for example when surplus, maturity, cash out flow or asset size hits certain levels. We expect trustees to document their strategy and explain why it is in the best interest of members.
There is acknowledgement that buy-out may not be in the best interest of members.
If the strategy is to buy-out liabilities with an insurance company, the scheme rules may give trustees some guidance and they may need to take advice and consult the employer. Among other things, trustees will need to consider whether proceeding with an actual buy-out, either outright or in stages, is the best way to protect members’ benefits and achieve the best price.
A hat is tipped to Railpen and the Church of England’s sustainability charter and encouragingly, the interests of members . We are asked to consider
…. the effect of buy-out on the possibility of future discretionary increases in payment may also be a relevant consideration.
There continues to be an obsession with the employer covenant. Schemes that want to run-on are advised to establish a “risk-buffer” to ensure that they are effectively over-funded. This can only be at the expense of productive capital that could be used elsewhere, DC members and the productive capital needed by the sponsor to deliver future benefits come to mind.
And trustees are advised that whatever they do, they do not do so offer their own backs.
Whichever option trustees choose, they may need to take advice about the risks and benefits of doing so, and their relevant duties.
The idea that professional trustees may know as much if not more than the advisers is not as yet countenanced. Many of these schemes are now operating in an autonomous fashion with consultants being used to test and validate, rather than to devise strategy. I expect to see more on the rise of the autonomous trustee in years to come.
The schemes in group two
Although TPR don’t say this, there is an assumption that solvent schemes will aspire to buy-out. However, the emphasis here is changing
Schemes may consider the emerging options such as consolidators, capital-backed journey plans, and the recent consultation on a public sector consolidator via the Pension Protection Fund. We would expect improved funding levels to allow for such options to be explored and whether they would be in members’ interests.
But the Pensions Regulator shows a degree of caution that suggests that innovation is still “tomorrow’s world”
It may be reasonable for some trustees to take a ‘wait and see’ approach, given the immaturity of these options.
And schemes are asked to specifically “wait and see” what TPR has to say on new ideas
We intend to publish guidance on DB alternative arrangements for consolidation later this year, which will provide more detail.
Of course for many distressed schemes, there is not time to “wait and see“
In recent weeks, I have come across examples of trustees preferring the haircut of the PPF to the offer of co-sponsorship through a capital backed journey plan.
There are very real issues here to do with member’s pensions. A wait and see strategy is not appropriate where a scheme loses its sponsor and where the funding position is too weak to consider self-sufficiency. But there are alternative solutions in the market to help and I hope that the Pensions Regulator will recognise that the time to act on these is now.
The DB funding code
We had been published the final version of the long consulted upon DB funding code in April, it is now rumoured to be publishable in the summer with implementation from September.
If this document is its prequel, then those who anticipate a radical departure from the past will be disappointed. There are some comments on yesterday’s statement expressing disappointment that the Pensions Regulator is not moving faster towards a more permissive regime that allows schemes more autonomy on investment and less reliance on covenant.
My feeling is that this paper is at the vanguard of actual practice at TPR and that the actual guidance being given by case-workers continues to lag the positive notes achieved in this document.
The delays in the production of the DB funding code reflect the deep conservatism within a regulator that has always taken “risk-based” to mean “risk elimination”. That points to a quiet graveyard – not the destination of choice for me!