TPR Corporate Plan

The Pensions Regulator has published its 2023/24 Corporate Plan. This is the third year of the Regulator's latest threeyear planning cycle. The Plan included the following updates and new points of interest:

  • A further delay to the Regulator's DB funding code of practice (see WHiP Issue 99) is confirmed. It is now due to take effect for valuations with effective dates from April 2024, rather than October 2023. There was no mention in the Plan of whether the associated regulations will start to apply at the same time but the Regulator's later-published annual funding statement (see below) mentions that they will.
  • The Regulator expects the outcome of the joint consultation on proposals for extending DC value for money assessment and reporting requirements (see WHiP Issue 100) to be published this summer. Legislation is likely to be needed to progress this. The Regulator will work with the Government and the FCA to explore how the value for money framework may be broadened "over the coming years".
  • The Regulator's general code of practice (formerly known as the single code) is due to be launched by the end of June 2023. Schemes are expected to be given time to comply with the new requirements for 'own-risk assessments'.
  • The Regulator will be working with the Government to explore options for better protecting value at decumulation for members of DC schemes. In the meantime, it will "reinforce the importance of acting in savers' best interests when facilitating their transition into decumulation".
  • The Regulator will "establish a baseline of the diversity of schemes' governing bodies and drive more diverse and inclusive decision-making". Following the recent publication of guidance (see below), the Regulator will now engage with schemes through supervisory work to understand the progress they are making, the challenges they face and to re-affirm expectations. It says: "This will enable us to share and reinforce best practice.".
  • The Regulator will assess options for driving up standards of governance and trusteeship, including the feasibility of mandating (via legislation) that a professional trustee sits on each board or accrediting or authorising professional trustees. Option analysis is expected to be published by the end of March 2024.
  • The Regulator intends to review its 'superfunds' (DB consolidator schemes) guidance and publish guidance on 'alternative DB models' during its 2023/24 financial year.
  • The Regulator will further develop the Pension Scams Action Group (formerly known as Project Bloom) to bolster the sharing of intelligence between partners and better co-ordinate disruption and enforcement activity.

TPR annual funding statement

The Pensions Regulator has published its Annual Funding Statement 2023. The Statement is particularly relevant to schemes with valuation dates between 22 September 2022 and 21 September 2023 (Tranche 18) but also to schemes undergoing significant changes that require a review of their funding and risk strategies. It includes content for schemes that may be receiving requests for reduced contributions, amendments to contingent asset arrangements, and proposals for other uses of surplus. It is also, of course, of general interest as an indicator of current Regulator thinking.

Naturally, the content is consistent with the Regulator's existing approach and its draft funding code of practice. The Statement applies this approach to scheme circumstances in the current economic environment. With reference to generally improved funding levels, with most schemes currently being ahead of their own expectations, the Regulator says the following:

  • Favourable market conditions mean that around a quarter of schemes could (ignoring market capacity limitations) currently buy out benefits. It says that trustees of such schemes should consider whether their long-term target is still the same. If that was buy-out, for example, should they now execute that plan or perhaps consider run-off to give members (and employers, for example where the scheme has an open DC section to which surplus could be applied in lieu of contributions) the potential to benefit from future surpluses, whilst using some of the surplus to mitigate investment risks?
  • The many other schemes in surplus on a technical provisions but not on a buy-out basis should consider whether their existing strategy and level of risk are in the best interests of members. Alternatively, should they apply some of the funding gains towards a less risky funding and investment strategy designed for a smoother and more predictable transition to their long-term target?
  • Schemes with funding levels below technical provisions, potentially including the minority of schemes where funding has deteriorated due to collateral call difficulties during last autumn's LDI turmoil, will need to reset their funding and investment strategies to reach their long-term target and should review their operational governance processes to ensure future resilience.

Other points of interest include the following:

  • Trustees should be mindful and realistic about the implications for their employer covenant in the current economic circumstances. When considering covenant, they should be sure to assess "refinancing risk", i.e. the risk of materially different terms and conditions insisted upon by lenders when existing debt facilities are refinanced.
  • The Regulator's new covenant guidance is expected later this year. Regarding this, the Statement says: "We intend to provide more detail on covenant visibility, reliability and longevity, how to treat guarantees for scheme funding purposes and more information regarding ESG risks and how these can be factored into the covenant. We will also outline various examples to support trustees in understanding how to apply any updated guidance.".
  • The Regulator expects that many trustees will be revising their mortality assumptions, after taking advice from their scheme actuary, in light of the latest reported trends. The Regulator says that the suggestion that there may be lower future life expectancies should be treated with a degree of caution and that it will take time to see the new trends develop. It says, as usual, that trustees should ensure that any changes are appropriate and justifiable.
  • There are sections with unsurprising content on dealing with employer requests to revise recovery plans and amend contingent asset arrangements.
  • Again this year, several pages of tables set out the Regulator's expectations regarding covenant, investment and funding in various combinations of scheme and employer specific circumstances. The revised tables set out the key risks on which the Regulator expects trustees to focus and features of the funding plans it expects to be developed, in both cases depending on scheme and employer characteristics. Whilst noting that the new funding law and code of practice are not yet in force, the Regulator urges trustees who have not already done so to set a long-term objective and formulate their journey plan.

LDI – TPR and FCA guidance

TPR guidance for trustees

The Pensions Regulator has published LDI guidance to replace its 2022 initial statement and subsequent guidance statement (see WHiP Issues 98 and 99). The new guidance, "Using leveraged liability-driven investment", sets out practical steps for trustees to take and is intended to apply whether trustees used a pooled or segregated LDI arrangement. This of course follows the gilts market turmoil in autumn 2022 when schemes' LDI arrangements resulted in the widespread selling of gilts and a downward spiral in their value, which led to the Bank of England intervening in the market.

The guidance sets out specific issues for trustees to consider, including:

  • "where LDI fits within your investment strategy
  • setting, operating and maintaining a collateral buffer
  • testing for resilience
  • making sure you have the right governance in place
  • monitoring LDI"

Points of particular interest in sections on these different topics include the following:

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Originally published 12 May 2023

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.