On 5 April 2018, the Pensions Regulator published its annual defined benefit funding statement for 2018. The Pensions Regulator has published its annual funding statement for 2018. The statement is aimed, in particular, at trustees and sponsoring employers of defined benefit (DB) schemes with effective valuation dates spanning the period September 2017 to September 2018 (referred to as tranche 13 schemes). Negotiations over these schemes’ future funding arrangements will be taking place over the coming months. While the Regulator’s analysis suggests marginally improved funding levels for tranche 13 schemes compared to their previous triennial valuations, the statement flags concerns about what the Regulator describes as the growing disparity between dividend growth and stable deficit reduction payments (DRCs). Noting that recent corporate failures highlight the risk of long recovery periods where dividends are excessive relative to DRCs, the Regulator says it expects trustees to “negotiate robustly with the employer to secure a fair deal for the pension scheme”. Besides dividend risk, the Regulator urges trustees to monitor other forms of “covenant leakage” such as intra-group loans, and take steps to ensure fair treatment for members. The statement highlights several other areas of risk, including:
- Transfer activityReflecting reported high levels of transfers out, the Regulator says that if trustees wish to include an allowance for future transfers in their technical provisions, they must review their scheme’s experience and likely trends very carefully.
- Scheme maturityThe Regulator expects advisers to alert trustees to the risks to funding and investment from increasing scheme maturity, particularly in the light of a surge in transfers.
- Brexit uncertaintyWhere appropriate, the Regulator expects trustees to have “open and collaborative discussions with their sponsors” about the potential impact of Brexit. If sponsors wish to extend recovery plans because of Brexit-related uncertainty, trustees should ensure shareholders are sharing the burden proportionately and seek other forms of security from sponsors.