TPR’s 2013 scheme funding statement

Introduction

TPR published its 2013 annual funding statement on 8 May 2013. This year’s annual statement is relevant for trustees and employers of all DB pension schemes, but is primarily aimed at those who are undertaking valuations with effective dates in the period 22 September 2012 to 21 September 2013.

Key points

TPR’s annual statement is essential reading for any schemes with a valuation date between September 2012 and September 2013.
There is a softening of tone from last year’s annual statement, with greater emphasis on flexibilities within the existing system in addition to the need for prudence.
The statement looks forward to a new era of regulation with the introduction of a new statutory affordability objective for TPR.
TPR’s programme of proactive early engagement with a number of key schemes will continue.

Change in tone

The most significant change in the statement is a distinct softening of tone from last year.

On recovery plans, for example, this year’s statement asks that, where there are significant affordability issues and trustees agree to lower contributions and a longer recovery plan, they “document the reasons for any change and indicate that they have had due consideration of the risks”. By contrast, last year a “material extension” to the recovery plan would have needed “sound justification”.

New Code of Practice

TPR will consult on a new code of practice in the autumn. The programme of proactive engagement with a small number of large schemes which started last year will continue and will help “refine the thinking” behind the consultation proposals.

But TPR has already indicated in the statement that the consultation will include:

changes made as a result of TPR’s new statutory objective “to support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation”1;
a new focus on integrated risk management – addressing covenant, investment and funding risks; and
TPR’s regulatory approach and how it will assess risk, including the new triggers for involvement with schemes (see below).

Triggers

As previously communicated, TPR has confirmed it will move away from fixed triggers for intervening in scheme funding, such as a recovery plan over 10 years, to a “suite of risk indicators”. These include:

whether recovery plan contributions and the amount of investment risk appropriately reflects the relative strength of the employer and also the affordability of contributions;
any specific issues and concerns relating to deterioration in sponsor covenant strength or possible avoidance;
the shape of recovery plans including initial low levels of contributions;
the investment performance assumed over the life of the recovery plan; and
any significant issues with previous valuation submissions.

A stepping stone

This year’s statement seems like a stepping stone towards an era of flexibility for DB scheme sponsors. This will be ushered in with a new code of practice to tie in with TPR’s new objective to consider long-term affordability.

In particular, specific recognition that a “strong and ongoing employer” is the best support for a DB scheme will be welcomed by many sponsors. But how TPR’s 2013 funding statement will translate in practice remains to be seen as TPR must currently continue to work within its existing statutory parameters.

1 Please see our Alert: “Budget 2013 heralds a new objective for TPR” (21 March 2013) TPR published its 2013 annual funding statement on 8 May 2013.