Background
Earlier this year, the Pensions Regulator (“TPR“) launched a consultation on its new statement of strategy (the “Statement“). The strategy forms an integral part of the new requirements (introduced by the Pension Schemes Act 2021) for all DB schemes to have a long-term funding and investment strategy and record it in the Statement, to be submitted to TPR. The consultation focused on the proposed form of the Statement, including the extent of information that will need to be submitted and evidenced to TPR.
The consultation period closed on 16 April 2024.
The Statement is part of the upcoming revised DB funding code (the “Code“) which was set to come into force on 22 September 2024 – although with Parliament in practical terms in abeyance until early September, it may not be possible to bring the finalised Code into effect before October 2024. This would be somewhat later than the date of 22 September 2024 when the associated funding and investment regulations take effect but since the impact is only in relation to actuarial valuations with as at dates on or after 22 September 2024, the delay is unlikely to cause practical problems given that schemes still have the usual 15 month deadline for submission of an actuarial valuation.
What is the Statement?
The Statement is intended to be a useful long-term planning and risk management tool for trustees.
The Statement will have two parts:
- Part One will set out the funding and investment strategy and must be agreed with the employer. This will detail the trustees’ plan for how they will deliver benefits to members over the long term. It will outline the scheme’s strategy and how the trustees intend to reach low dependency by the point the scheme is significantly mature. This will include funding strategy, investment strategy, and an outline of the journey plan. It will also cover the scheme’s funding position, information on discount rates and other key assumptions (e.g. financial and demographic information); and
- Part Two will cover supplementary matters such as: the trustees’ assessment of how successfully the funding and investment strategy is being implemented and related risks; actuarial information, including a summary of the actuarial valuation; investment information relating to the current investment strategy; and the trustees’ assessment of the employer covenant, and the evidence on which it is based. Part Two requires employer consultation only.
The four proposed templates
The Statement must be submitted in a standard form “as set out by TPR”. There are four proposed templates to reflect the different information required from schemes depending on their circumstances. Specifically, whether a scheme is submitting a ‘Fast Track’ of ‘Bespoke’ valuation, and whether it is before or after its relevant date (the actuary’s estimate of the date when the scheme will (or did) reach significant maturity).
Bespoke approach
The Bespoke approach offers trustees greater flexibility in their funding approach. Bespoke valuations will be required to provide more detailed information upfront in the Statement outlining how the approach is compliant and how risks are managed.
Fast Track
TPR will use Fast Track as a filter for actuarial valuation submissions with those that meet the Fast Track parameters unlikely to receive further scrutiny. TPR anticipates less information being provided under the Fast Track approach than under the Bespoke approach.
Proportionality
TPR is proposing to adjust some of the information required from smaller schemes – from an actuarial standpoint, this means schemes with less than 100 members. For investment purposes, TPR has defined smaller schemes as those with less then £30 million in s.179 liabilities (provided the scheme opts to be treated as ‘Tier 1’ for scheme return purposes).
Covenant
Trustees typically rate covenant support on a scale of 1 (strong) to 4 (weak) in the TPR scheme return. Under the new DB funding regime, trustees will need to provide more detailed information on the elements of covenant support in the Statement, depending on how much reliance is placed on the covenant to support the level of risk implied by the funding and investment strategy over the “reliability period”.
TPR’s revised DB funding code will set out expectations on how trustees should assess the employer covenant. Further guidance on all aspects of the covenant information being requested is also expected to be covered in TPR’s “forthcoming” covenant guidance which is expected in summer 2024.
WB Comment
For most DB schemes, the Statement will require extensive actuarial, investment and covenant input and on the face of it, this will create a lot of extra work and added expense. On top of the burgeoning requirements connected with the introduction of TPR’s Single Code of Practice and the ESOG requirements, trustees are being subjected to more onerous governance and reporting requirements. This could stretch scheme resources even further and calls into question the proportionality of the requirements bearing in mind many DB schemes are targeting buy-out.
In response to the consultation, the industry appears to have been unanimous in its views that whilst standardisation is important, changes are needed so that: (i) the requirement for a Statement does not end up placing an even greater compliance burden on trustees; (ii) TPR is receiving the information it does not have already and duplication is avoided (i.e. some of the relevant information is already gathered through the existing valuation process and annual scheme return); and (iii) proportionality is exercised for not just smaller schemes but also for very-well funded and low risk schemes. Linking the amount of information to the actual risks being run seems to be a sensible approach.
With the General Election a matter of weeks away it remains to be seen when TPR will react to industry feedback on the consultation and more importantly whether the final Code will be actually be published during the summer ahead of the September 2024 deadline.