The Pensions Regulator (TPR) in the UK today launched a consultation on its statement of intent that will be required under the new funding code to come into effect from 22 September. But while the guidance is welcome, UK pensions consultants are concerned about extra requirements becoming too burdensome on schemes.
The statement of intent, on which TPR will consult until 16 April, requires schemes to submit information on their long-term objectives, maturity and covenant information at each valuation under the new funding regime.
Jon Forsyth, partner at LCP, said that “much of this will be new to schemes”, and trustees and their advisers will need to “spend time getting familiar with these figures in coming months”, adding that some may need to take professional covenant advice for the first time.
Forsyth said that with the first part of the statement of strategy covering funding and investment strategy, which needs sponsor agreement, sponsors should also take note and ensure they understand what is required.
Emily Goodridge, managing director at Cardano, said the requirement for trustees to report covenant metrics under the statement of strategy demonstrates the continued focus of TPR on the importance of covenant, as does TPR’s reiteration of both funding and investment risks as needing to be supported by employer covenant.
She said: “We are supportive of TPR expecting trustees to look beyond the rating to consider the extent to which covenant can support scheme risks; and hope TPR makes clear the importance of a proportionate assessment of covenant across both ‘bespoke’ and ‘fast track’ valuations, regardless of the information requirements for the statement of strategy.”
However, she added that while the regulator wants to be “proportionate”, there is a risk that an “overly prescriptive” approach pushes trustees into a “costly tick-boxing” exercise based on a central scenario, rather than really thinking about covenant risks and how best to manage these collaboratively with the sponsor.
Laura McLaren, head of DB actuarial consulting at Hymans Robertson, added that the proposed template and the information required “looks like a significant addition to valuations”.
She said: “The challenge will be to streamline compliance so it’s as easy as possible.”
McLaren said that the statement of strategy offered “some hope” that TPR would use more discretion in how much information schemes need to provide.
She continued: “But it hasn’t cut requirements in many places. A scheme’s route to compliance will have the biggest effect on how much detail it provides. The example ‘bespoke’ statement runs to over 20 pages, which underscores the appeal that ‘fast track’ could have.”
She said that all schemes will face a “lot of work” to set out a strategy in the format required.
“This is the first time trustees are required to include covenant information with a valuation. They’ll also need to say how the scheme is to provide benefits in the long term, buyout, run-off or alternatives, and summarise the approach to de-risking between now and the end of the journey plan,” she continued.
McLaren added that is is not clear how much value the extra disclosure requirements add in a funding landscape that’s changed since the process for these changes began. She pointed out that only a small, and shrinking, number of schemes are poorly funded and amid the Mansion House agenda, increasing focus is on endgame and surplus management rather than scheme funding.
“Schemes with the earliest in-scope valuations will have their work cut out. They need TPR to quickly publish the final funding code, ‘fast track’ parameters and other guidance,” she said.
Mark Tinsley, principal and senior consulting actuary at Barnett Waddingham, welcomed the statement of intent saying it is a “key piece of the new funding code puzzle”.
“After being criticised in the wake of the 2022 Gilts crisis, it appears as if the regulator plans to use the change in funding regime to significantly increase the amount of data it collects from schemes at each valuation,” he added.
However, Tinsley said that there is a danger that this drive to become a more data-led organisation could result in significant extra costs for schemes, and while TPR seems to be mindful of this with a less burdensome approach for well-funded and small schemes, “there are still instances where the amount of work does not appear justifiable and further reflection from TPR is required”.
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