- Charles Counsell warns DB scheme trustees of the storm to come
- News from 2018: DB scheme funding levels improve
- The Bespoke approach to DB scheme funding may be more popular than anticipated
Charles Counsell warns DB scheme trustees of the storm to come
In a blog published on 5 August, Charles Counsell, the Pensions Regulator’s Chief Executive, said that the Regulator expects more Covid-19-linked corporate insolvencies in the autumn and during 2021, and for more companies to be looking at restructuring, stressing that DB scheme trustees are the first line of defence for their members’ pension savings when employers experience significant financial challenge.
Much of the blog summarises actions taken by the Regulator in relation to DB schemes and expectations it has of DB scheme trustees on which it has already reported and published respectively. The blog, in particular, highlights aspects of the Regulator’s updated guidance (see Pensions Bulletin 2020/25) where trustees are being asked to suspend or reduce contributions from an employer experiencing financial distress.
There is also an explicit acknowledgement that the Regulator cannot assist every trustee board coming under these pressures and that it will have to be strategic in how it focuses its resources.
Comment
At one level this blog is simply re-wrapping messages and guidance already delivered. Its significance is that the Regulator is acknowledging that challenges to DB funding as a result of corporate distress are likely to go far beyond the initial three-month period during which the Regulator was willing to countenance contribution holidays and reductions at the beginning of the pandemic.
As we move beyond high summer and into the autumn the Regulator wants to ensure that whatever happens in each case in which the scheme sponsor has to act, the DB scheme is treated fairly – but the Regulator could be absent for many schemes beyond continuing to publish materials on its website.
News from 2018: DB scheme funding levels improve
The increase in assets over the three-year period to 2017/18 exceeded that in liabilities over the same period, resulting in an improvement in the average funding level with no less than 37% of schemes reporting a surplus on the technical provisions basis. This is the main finding in the Pensions Regulator’s latest annual scheme funding statistics (see also the technical annex), which reports on the funding position of DB pension schemes with valuation dates between 22 September 2017 and 21 September 2018 (ie “tranche 13” schemes with an average valuation date around 31 March 2018).
For schemes in tranche 13 that have submitted their valuations, the average funding level is 93.4% on a technical provisions funding basis, a 4.8% improvement from the same valuations submitted three years prior. And the most mature schemes (those whose liabilities are 75% or more in respect of pensioners) are on average nearly 100% funded.
The median recovery plan length is 5.2 years for those schemes in deficit, with median recovery plan end dates extending by 2 years since the previous valuation. The average deficit reduction contributions of 2.2% of technical provisions is unchanged from the 2.2% seen three years prior.
The average real discount rate for all these schemes drops down to -0.77%, from +0.15% three years prior. The average assumed life expectancies for tranche 13 are lower than the equivalent valuations three years prior.
Comment
This piece of history may be the last “good news” on the scheme funding front for a while due to the impact of the Covid-19 pandemic. If so, it will mark the end of a period extending over four valuation cycles under the current funding regime where many schemes have gradually improved their funding position thanks to significant deficit repair contributions, mainly positive investment markets, the use of hedging by some, whilst having to reflect significant falls in bond yields and increases in life expectancy.
The Bespoke approach to DB scheme funding may be more popular than anticipated
The Society of Pension Professionals has published the latest survey of its members’ views – this time on the proposed new scheme funding regime (see Pensions Bulletin 2020/09), the first consultation on which now closes on 2 September.
The survey focuses on the Bespoke route to compliance on which there is less detail in the consultation than the tightly constrained Fast Track that the Regulator expects a “significant proportion” of schemes to operate. However, the responses received suggest that despite few believing that the Bespoke route will be truly flexible, maybe around a half of schemes will favour it over Fast Track. There are a range of reasons why schemes might elect for Bespoke, with the lack of flexibility within the Fast Track route and fears over unsuitable outcomes emerging as key concerns.
Comment
The current scheme funding regime is 100% bespoke in that it can be operated on a truly scheme-specific basis. Perhaps it is inevitable, as people focus on this consultation, that a significant number of schemes desire not to have to operate under the restrictions of Fast Track. But the Bespoke route as currently proposed is not truly bespoke.
Only when we get to the second consultation, now expected in early 2021, when the final model and parameterisation of Fast Track is revealed and we know whether there are any alterations to the Bespoke route, will we have a good idea of how the 5,000 plus DB schemes are likely to split.
