"TPR keeps up
pressure on schemes over future funding despite COVID-19 crisis" - LCP

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Analysis of The Pension Regulator’s Annual Funding Statement for 2020 by LCP shows TPR is still expecting pension schemes to get a fair share of available cash despite the current crisis.

Two areas where TPR has provided new guidance or responded to industry requests for clarification are:

1. Expecting trustees to do more to scrutinise corporate finance flows for potential ‘leakage’

The latest guidance puts a clear expectation on trustees to look closely at all the different ways in which potential support for the pension scheme can ‘leak’; not just through paying out dividends; this includes things like financial flows across the Group, transfers of business or assets at less than market value, excessive executive remuneration and so forth. For example, where ‘cash pooling’ and inter-company lending occurs TPR says: “….we expect trustees to understand the intention behind the arrangements and the expectation and ability of the employer to retrieve funds. In the event amounts are not recoverable or readily available to meet scheme funding requirements, we expect trustees to account for that in their assessment of covenant strength and in scheme funding and investment decisions. Analysis of affordability should be before payment of amounts as intercompany loans or under cash pooling arrangements”.

2. Limited flexibility on valuation dates

Some schemes with three-yearly valuation dates that fall in the middle of the current crisis have expressed an interest in flexing the valuation date, for example, to a time before the crisis when the situation was more ‘normal’. TPR has said that Trustees should consider whether this would be ‘in the best interest of members’, with the implication that it will be member outcomes not the concerns of sponsors that should determine how this issue is approached.

TPR says:

“If they decide to change the valuation date they should do so having obtained and considered legal and actuarial advice, and consider taking account of changes in the investment markets and employer’s covenant since the new date of the valuation. Trustees who take this decision can expect us to question their reasons for the change.” 

Commenting, David Everett, Head of Pensions Research at LCP said:

‘TPR is trying to strike a delicate balancing act between its general direction of travel in recent years, which is to be ‘clearer, quicker and tougher’ with schemes and employers, and the need to avoid putting undue pressure on employers in the current environment’.

‘The latest funding statement still has elements of the new tougher approach, including expecting trustees to be vigilant if it seems that money that could have been used for the pension scheme has ‘leaked’. On the area of exercising flexibility on scheme valuation dates, TPR seems to be advocating against, unless this is demonstrably in the interest of scheme members’.