The Pensions Regulator (TPR) has today issued its Annual Funding Statement for 2023.  Many of the themes are familiar, with integrated risk management a thread that runs through the document.  However, financial market developments over the last year mean TPR has given this statement a new slant.   

TPR recognises that many schemes will be in a very different financial position from last year – some much better as a result of higher gilt yields, others much worse if they suffered during the LDI crisis following last September’s mini-Budget.   

All this means that TPR is encouraging trustees to look at their current position afresh – to capture good news where it has occurred; or if things have gone badly to understand why and to review their strategy accordingly.   

Improved funding levels for many schemes are influencing TPR’s commentary, including for example references to: 

• using improved funding levels to support de-risking and stronger funding targets;  
• the potential use of surplus including where schemes are run on;  
• preparing for buy-out where affordable; and  
• the possibility of reducing contributions where funding levels have improved. 

Responding to a shifting market 

“Overall, TPR has done well in recasting familiar guidance so that it remains relevant following the big funding gains many schemes have seen in the last year,” said Richard Soldan, LCP Partner and Chair of LCP’s DB Funding Group.  “Given there have been such significant market shifts, TPR is understandably keen that trustees make the most of any gains or re-think their strategy if funding plans have been knocked off course. TPR recognises that trustees could run schemes with a surplus on into the longer term for the benefit of their members, and that this could potentially also benefit the sponsoring employer, for example by funding contributions to a DC section.  Trustees would need to make sure there is a balance here though, and TPR is quite reasonably encouraging trustees to set aside part of any surplus as a buffer, in case the funding position worsens in the future.” 

Getting ready for buy-out  

Commenting on the increased focus on buy-out and improved funding levels, LCP’s Head of Pensions Strategy Michelle Wright said, “TPR estimates that around 25% of schemes can now afford to buy-out their liabilities in full, but is quite rightly suggesting schemes respond in a measured way – taking time to consider the full range of strategic options and to carefully prepare in order to achieve the best outcomes for members. In a busy insurance market, thorough preparation is more important than ever, so we are pleased to see this given such prominence in TPR’s messaging. TPR has noted that buying-out liabilities can be a lengthy process, so it will be important that pension schemes understand how to prioritise their preparation activity and resources on those areas that will deliver the greatest value.”  

Employer covenant and refinancing risks  

TPR emphasises that employer covenant remains central to the level of risk a scheme can contemplate, and points to refinancing as a key risk factor at this time.  LCP Partner Helen Abbott said, “Refinancing risk is a key component in any covenant review at the moment, given the increases we have seen in interest rates recently and it’s good to see TPR recognising this.  This is not just something to think about if the employer is refinancing now, as any upcoming refinancing in the next couple of years is likely to be on significantly different terms to those in place at the moment.  In some cases the impact is going to be very material, so it's about understanding the medium and longer term outlook for the covenant as well.”