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Reading between the lines of TPR’s ‘Annual Funding Statement ‘

Earlier this month, the Pensions Regulator (TPR) released their second ‘Annual Funding Statement’, which created a great deal of buzz around their ‘new-found flexibility’.

Right off the bat, let me say that there is NO NEW FLEXIBILITY. What we have seen from a large section of the Industry is the usual ‘king’s new clothes’ reaction, to any missive from Brighton, from those that don’t know how TPR works. There has ALWAYS been flexibility in the system. I know, because my colleagues and I have been there, seen it and employed it ourselves

Whilst I’m talking about Industry misunderstanding, I have to mention the 10 year trigger, as I have done many times before. It is and always has been a trigger. Not a target. It was a way that TPR could quickly split the data they received into two, broad piles. How many of you, in the early days of Scheme Funding, received a very quick response when a 9 year 6 month recovery plan was submitted? Quite a few, I’d wager. It was never a bar that had to be kept under, like a financial limbo competition. So, when TPR says they are “moving away from setting triggers focused on individual items”, it is not a huge step for them. They’re probably just sick to the back teeth of trotting out the ‘trigger not a target’ line!

Now, let me address the remainder of the statement. In short, it follows a similar brief to last April’s release, in that it collates previously available information/guidance and brings it together in one place, to encapsulate current regulatory thinking. Not ground-breaking, but certainly a useful summary, for us to gauge where TPR’s thinking is at.

Covenant and affordability remain at the heart of the funding process, with an increased focus on investments. TPR have named this “Integrated Risk Management”. This is what Trustees and Employers should have been doing since the start of the Scheme Funding regime. So, whilst there is little we have not heard before, there is a new abbreviation to add into the mix – IRM.

Employer Strength
We have always said that the strength of the employer, along with their ability to make good the scheme deficit, is the key factor to be considered. Pre and post retirement discount rates are part of that, as is the investment strategy for the scheme. Let me use a rather extreme investment strategy, to underline that point – if the Trustees were to place all (or part) of the scheme funds on the Epsom Derby, how able is the Employer to replenish the funds if the horse doesn’t win? If the answer is ‘very’, then Trustees may wish to look at a more adventurous investment policy. If the answer is ‘highly unlikely’ or ‘not at all’, the Trustees need to exercise greater prudence.

Future Changes
An autumn consultation is in the offing which, we are told, will include TPR’s regulatory approach and how they assess risk. I can’t encourage you enough to take part in this, if you have the time to do so – I know I certainly will. It is far too easy to hit the regulator with brickbats, without providing constructive feedback when the opportunity arises. We may not all get what we want from the consultation, in fact I’d pretty much guarantee it (TPR has to take an objective approach based on the overall good, rather than any vested interests) but that should not be a barrier to participation.

I mention ‘objective’ in the previous paragraph, so it would be wrong of me not to address the spectre at the feast being TPR’s new objective. The Chancellor said in his budget statement that “The Government will provide The Pensions Regulator with a new objective to support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation”.

The draft 2013 Pensions Bill provides further clarification stating that, when carrying out its scheme funding duties, TPR should “minimise any adverse impact on the sustainable growth of an employer”.

I will cover this in full, in a separate newsletter, when the regulator indicates how it intends to interpret the new objective. In the meantime, I shall say this. The Chancellor provided a significant caveat in his speech, when he says growth should be supported where “…fully consistent with the 2004 funding legislation…”. In other words, TPR can carry on regardless…unless BIS or No. 10 decide to get involved. ‘Twas ever thus!

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Category : Employer Covenant — admin @ 9:20 am June 12, 2013