3 May 2023
The Pensions Regulator (TPR) has released its 2023 Annual Funding Statement (AFS). It sets out TPR’s expectations for trustees and employers of defined benefit (DB) schemes currently undertaking actuarial valuations.
The Statement is for all trustees and sponsors of defined benefit schemes but is especially relevant for schemes with valuation dates between 22 September 2022 and 21 September 2023.
The 2023 statement focuses on the impact of the sharp rise in gilt yields seen in 2022 and consequent actions trustees should be considering. The Pensions Regulator (TPR) identifies a number of areas for trustees to look at including re-thinking strategy, investment, covenant and mortality. As expected, there is a focus on locking in funding gains, reducing investment risk and insuring benefits where possible. TPR also acknowledges that there may be a reduction in life expectancies post Covid. Unsurprisingly, TPR urges trustees to consider the impact of higher interest rates on the employer covenant.
The key messages are:
The speed and magnitude of the decrease in assets and liabilities will have surprised many. Long term objectives …and associated funding and investment strategies may now need to be reviewed
The consultations are complete and the new funding code and associated Regulations are expected now to come into force in April 2024. The delay from the original target date of October 2023 is to ensure “there is sufficient time for the Regulator and the industry to prepare for the new requirements”.
TPR confirms that, if you have a valuation date between 22 September 2022 and 21 September 2023, this will be carried out under the current funding regulations.
TPR notes that funding levels have improved for most schemes. Its modelling suggests that around one quarter of schemes are now fully funded on a buyout basis. Here the key message is that trustees should assess the funding position of their schemes and consider what actions could be taken to accelerate progress towards their long term target.
Where fully funded on a buyout basis – take advice and consider whether or not to insure. In most cases insurance will be the right approach, which means schemes need to get transaction ready to give themselves the best chance of obtaining terms in a crowded market that will only get busier. Actions include getting data ready, preparing a benefit specification and de-risking assets to match insurance pricing as far as possible.
Where funding has improved but is still below buyout – consider whether the funding target could be strengthened and whether assets can be de-risked to accelerate progress to your long term objective; ensure your funding and investment targets are aligned; consider aligning with the broad principles of the new funding code.
Where funding has deteriorated – a small minority of schemes have seen a deterioration in funding. In these cases, trustees should ensure they understand why the position has deteriorated and then rebuild their funding and investment strategies to address the current position.
The sharp rise in global interest rates led to a very sharp fall in the values of both liabilities and matching assets. TPR notes that the impact will vary by scheme but in many cases allocations to matching and return assets may be out of balance. TPR also highlights the volatility seen in gilt markets during September and October 2022 and the issues this caused for some schemes with leveraged LDI holdings. In terms of actions, TPR suggests that trustees consider reviewing:
For details of TPR’s April 2023 guidance on LDI: Using leveraged liability-driven investment
TPR highlights that higher interest rates and high inflation will impact on employer finances through borrowing and energy costs. Although funding levels have improved for most schemes, TPR warns against complacency on covenant and suggests that trustees:
TPR also highlights the increased risk associated with corporate refinancing now we have moved from near zero interest rates to a higher interest rate environment. Trustees should factor increased interest costs into their assessments and should not finalise any covenant assessment until the terms of the refinancing are clear.
TPR notes that mortality data has changed over the last few years due to the short term effects of Covid and the expected longer term impact. TPR urges caution but recognises that schemes should review mortality assumptions to allow for the expected longer term impact of Covid 19.
Interestingly, the Pension Protection Fund has updated its own mortality assumptions for the same reasons, leading to a reduction of around 2% in liabilities.
We suggest that trustees review their mortality assumptions, including a postcode analysis where appropriate, to ensure their mortality assumptions reflect both the latest national trends and the specific profile of their membership.
TPR notes that some schemes, which are ahead of plan, may look to reduce or stop deficit reduction contributions (‘DRCs’) to reflect the improved funding position. Here, TPR expects trustees to consider the following points first:
The key factors determining what TPR expects of trustees are employer strength, funding strength and maturity. Please see the table at the bottom of the following link to identify your group and what TPR expects.
Read the full Statement here: Annual Funding Statement 2023
To discuss your specific requirements with a member of our team, please start by sending us a brief message or, if your enquiry is more urgent, call our Head Office on 01252 894 883 and we will be put you in contact with the right person.
