The Pensions Regulator publishes annual statements that set out guidance on how it expects trustees and employers of defined benefit (DB) schemes to comply with their obligations about scheme funding given the financial and economic conditions of the time.
On 26 May 2021, the Regulator published its 2021 statement, aimed at trustees and employers whose next actuarial valuation’s date is between 22 September 2020 and 21 September 2021 (with the deadline for completion of those valuations 15 months later). The statement is also relevant to schemes facing significant events that require a review of their funding or risk strategies.
The Regulator has confirmed its recognition that the Covid-19 pandemic and Brexit have both presented challenges for some businesses and the pension schemes they sponsor.
However, its analysis was that the aggregate funding levels for schemes being valued on 31 December 2020 was broadly unchanged compared with three years previously. There is though some variation depending on the extent to which schemes had hedged their interest rate and inflation risks. Those that did hedge appeared to have slightly improved funding levels, while those that did not showed slight deteriorations in their position. Schemes being valued as at 31 March 2021 were expected to be in an even more favourable position. However, the position for individual schemes can vary a great deal compared with the overall aggregate position.
Once again, the Regulator provides a table categorising ten variations of guidance for trustees linked to the key measures of strength of the employer covenant, funding level and maturity.
Key points for scheme valuations
A little more time to wait for the new DB funding code
The Regulator confirmed that the next step is for the Government to consult on regulations to fully stipulate the requirements in the Pension Schemes Act 2021 on funding and investment strategy. The new DB funding code will have to be consistent with that legislation and so the intended second stage consultation will take place towards the end of 2021. Therefore, it does not expect the new code to come into force until late 2022 at the earliest.
Capita comment
There is always a balance to be struck between protecting members and not over burdening employers; with recent history being rather challenging to the latter. How current events impact on scheme funding, investment and covenant will vary considerably between different employers and industries. We believe ad-hoc changes to actuarial assumptions should be avoided. To pick out the genuinely important from the merely distracting, trustees and employers should take professional advice.
As well as dealing with current events, trustees need to be aware of what is likely to change in the near future. Most schemes will need to undertake additional governance duties in the next two years, as reforms aiming to ensure an effective system of governance (including the requirement for own risk assessments) are introduced. Documenting the key risks and thinking about how they are managed may make this process easier.
The new DB Funding Code will also be within that timeframe. Although it has been delayed, we think that trustees and employers should remain focused on their long-term objectives and targets. Once fully implemented, the Pension Schemes Act 2021 (enacted in February) will make it a legal requirement for schemes to have a specific long-term strategy designed to deliver an agreed long-term objective. Trustees should start considering how best to formulate such a strategy in consultation with the employer.
Please speak to your usual Capita contact for further assistance.