In a discussion with LCP, David Fairs, Executive Director of Regulatory Policy, Analysis and Advice at The Pensions Regulator (TPR) said that schemes who plan to reduce technical provisions to reflect Covid-19 mortality projections should think about the ‘consequences if these things don’t play out in practice.’

He also warned that it is still ‘early days’ when it comes to understanding the long-term impact of the pandemic on life expectancy assumptions.

His comments came in a discussion with LCP’s Steven Taylor as he referenced the wide variation in market commentary and predictions around mortality assumptions and said the industry can expect more information on this in TPR’s upcoming 2021 Annual Funding Statement. 

The Regulator’s comments are a reminder of the risks of reacting too quickly to recent events, which could result in a sharp improvement in the forecast funding position followed by a downgrade if forecast mortality deteriorations fail to materialise. 

Other issues raised in the discussion, were:

• Schemes’ investments responded well in general to the pandemic and funding levels have now mostly recovered. However, TPR’s upcoming Annual Funding Statement will consider issues such as the potential impact on sponsor covenants when Government starts to withdraw Covid-19 support. Otherwise, the AFS will be “evolution not revolution”.
• TPR continues to review feedback from the first stage of its major consultation on a revised code of practice for defined benefit (DB) funding and is looking carefully at the Fast-Track valuation parameters ahead of publishing an impact assessment.
• The Regulator has seen indications of ‘broader interest’ in using Collective Defined Contribution schemes (CDC) although there is still someway yet to go in the regulatory process needed for the first schemes to emerge.
• TPR continues to see innovation in capital backed models and a DWP response to last year’s consultation on Superfunds and wider capital backed models is expected soon.
• In line with the new regulations on climate change reporting for larger schemes coming into force later this year, TPR will be raising the profile of climate change and ESG issues. David Fairs stressed that there is a lot of practical support for trustees on these issues with many organisations producing detailed guidance and information.

Steven Taylor, Partner at LCP, commented:

“It’s welcome news that the TPR will be providing more information on longevity assumptions which will be of interest both to trustees in upcoming funding valuations and also to sponsors as they consider the life expectancy assumptions used in their financial statements. The Regulator expects schemes to take care when updating these assumptions in light of Covid-19 in case experience turn out differently and so this area has potential to be another driver of contingent funding mechanism in upcoming valuations.

“It’s encouraging that we can expect to see further developments during the year for superfunds and also in the CDC scheme space. It will also be a relief to hear there will be an impact assessment on the proposed new fast-track regime and it will be fascinating to see how TPR’s perspective has evolved since its first consultation last year.

You can watch the full interview here.