The Pensions Regulator has published its annual funding statement 2024, reminding trustees to review their objectives and strategies if their funding level has improved, and prompting them to consider alternatives to buyout. Industry experts have noticed messaging to align with the government’s agenda.  

Half of schemes are expected to be funded beyond their estimated buyout funding levels, giving trustees and employers the opportunity to reassess their long-term objectives, TPR said as it published the statement on Wednesday morning.

Interim director of regulatory policy, analysis and advice, Louise Davey, said: “Where funding levels have improved significantly, trustees should review objectives and strategies, set during a period of low interest rates, to ensure they remain in the best interests of members. If they are not, trustees should look to redirect some of their funding level improvements towards a funding and investment strategy that is aligned with their plans for the scheme.”  

Davey said the options range from moving to a long-term target “with the potential to generate additional surplus”, to entering a consolidator or insurance arrangement.   

TPR acknowledged that surpluses have attracted interest from sponsors and members alike, with some of the former asking to reduce or suspend contributions and the latter requesting discretionary increases. 

"When considering these requests, trustees should be mindful of their overall position, the resilience of their investment strategy and level of covenant support,” the regulator said.  

On discretionary increases, it added that “trustees should also consider the situation of members who would benefit from a discretionary increase, and whether their scheme has a history of making such awards”.
   

 

While many funds have improved funding levels, around a quarter are expected to remain in deficit on a technical provisions basis. TPR said trustees of such schemes need to focus on achieving a recovery plan that is “as short as reasonable, based on the employer’s affordability”. It also reminded them to be “very mindful" of the employer covenant, given their higher reliance on it. 
  

The publication of the annual funding statement has prompted some in the industry to highlight the absence of a new funding code.

Matthew Arends, head of UK retirement policy at consultancy Aon, said it was “reassuring” that TPR recognised the improvement in most schemes’ funding levels, noting that the funding statement is much shorter than in previous years. 

"That is to be applauded but is also probably a reflection of it being something of a stopgap before the funding code comes out,” he remarked. “It may place an even stronger spotlight on the question of why TPR is still implementing a new funding code and funding regime that will be brought in later in 2024.” 
  

TPR mentions value from private market investments in relation to schemes funded between full technical provisions and full buyout funding. This “could be a nod to the wider initiatives proposed by government and in the Mansion House Compact”, Arends said. 

 

For some, it is too obvious a nod. Paul Houghton, partner at consultancy Barnett Waddingham, found the highlighting of private market investments “slightly out of place, coming across as an overly deliberate nod to the chancellor”. 

  

TPR has generally tweaked last year’s key messages in light of the government’s productive finance agenda. Houghton welcomed the greater prominence given to run-on and alternatives to buyout but was disappointed by what he sees as TPR’s “slightly cautious tone” on this.

 

Houghton also said the messages in the statement “really relate to a new funding regime that has been promised for several years – and not the one technically in force. What we’d really like to receive from the regulator is the new code of practice that these messages are geared toward.” 

Iain McLellan, head of research and development at advisory firm Isio, noted that this is the last funding statement before the new funding code comes in and refers to government policy initiatives such as surplus distribution and a public sector consolidator.   

 

"It’s positive to see that TPR is encouraging trustees to consider the wider options, including, particularly for larger schemes, running on and using surplus for the potential benefit of sponsors and members,” McLellan said.  

 

TPR highlighting the growing range of endgame and consolidation options was also welcomed by Laura McLaren, head of DB actuarial consulting at Hymans Robertson, who said that the economics of running on are likely to be more attractive for larger schemes. 

 

Risks, ongoing expenses and discretionary increases should all be considered, she agreed, but said it was surprising to see “very little emphasis on the importance of building consensus between the sponsoring employer and trustees, as this approach is likely to lead to the best outcomes”.  

  

“Given how much the DB landscape has changed, trustees and sponsors are going to need a lot of support to carefully weigh up a decision between run-on, buyout or an alternative.” 

 

What is your view on the annual funding statement?