Pensions trustees should review their objectives and strategies as a result of material improvements in funding levels, the Pensions Regulator (TPR) has said in its 2024 Annual Funding Statement (AFS).
In its yearly consideration of the state of the industry, TPR said half of schemes were expected to have exceeded their estimated buy-out funding levels, meaning their trustees and employers offering the schemes now had the opportunity to reassess their long-term objectives.
The AFS is for trustees and sponsoring employers of defined benefit occupational pension schemes and is particularly relevant to schemes with valuation dates between 22 September 2023 and 21 September 2024 – which are also known as Tranche 19 or T19 valuations.
Classifications
Retaining the three groupings that it used to classify pension schemes in last year’s annual statement, the regulator set out the options for trustees and managers of schemes to consider.
Where a scheme’s funding level was at or above buy-out, the main options were to buy out or run on. TPR said: “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.” It added that it expected trustees to document their strategy and “explain why it is in the best interest of members”.
In relation to funding levels above technical provisions but below buy-out, TPR said it would expect trustees to review the long-term objective and a timescale for reaching it. “If funding levels have significantly improved in recent years, trustees should consider accelerating this process,” it said.
If the scheme’s funding level is below technical provisions, trustees should focus on bridging this gap first, the regulator said, by revisiting the provisions to ensure they were aligned to the long-term funding target. It expected around a quarter of schemes to remain in deficit on a technical provisions basis.
Best Interests
Launching the AFS, TPR’s Interim Director of Regulatory Analysis and Advice, Louise Davey, said: “Where funding levels have improved significantly, trustees should review objectives and strategies, set during a period of low interest rates, to ensure they remain in the best interests of members.
“If they are not, trustees should look to redirect some of their funding level improvements towards a funding and investment strategy that is aligned with their plans for the scheme. Options range from moving to a long-term target with the potential to generate additional surplus, to entering a consolidator or insurance arrangement.”
MHM’s view
Running on for surplus instead of buying out and winding up is a current theme in the pensions industry, largely following a significant improvement in funding levels over the last couple of years – the Liz Truss effect?
In our view, this is only likely to be financially viable for larger schemes – perhaps those with assets in excess of £250 million – because of the annual costs of running the scheme, which are disproportionately higher for small schemes.
And, running on is not without risk. For many schemes and their sponsors, the short-term cost of securing benefits through an insurance company and winding up the scheme may be a price worth paying to remove the risk and provide certainty for all stakeholders, including members.
To speak to us about this or any other issue affecting your scheme, please contact:
David Hodgson, Director
MHM Pension Services
T: 01423 229029
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