LawDeb in reaction to The Pensions Regulator's Annual Funding Statement, released today
The Pensions Regulator has today released its Annual Funding Statement, encouraging pension scheme trustees to work collaboratively with scheme sponsors on pension scheme funding and covenant monitoring in light of the current pandemic.
We found the Regulator’s statement to be well balanced and carefully considered.
The pendulum seems to have swung in favour of sponsors, which is an understandable recognition of the very challenging circumstances many businesses will find themselves in. However, the Regulator clearly lays out their expectation that trustees continue to challenge sponsors, manage risks and protect the interests of members. There are also clear warnings for Trustees to be alert to covenant leakage from the sponsor beyond just dividends.
In commenting on March/April 2020 valuation dates the Regulator does not anticipate the funding positions of all schemes to deteriorate to the same extent as markets. That is certainly our experience at LawDeb. Whilst a small number of schemes we work with have suffered a serious impact on funding levels our assessment at this stage is that most have not.
The position on covenant is harder to read at this stage. Inevitably we work with some schemes where it is already apparent the sponsor is significantly stressed, but for many the position is unclear. It is good to see the Regulator acknowledging that it is likely to take time for the position to become clear.
One of the Regulator’s key themes is that trustees and employers must work together on dealing with Covid-19-related issues. We agree and as professional trustees with experience of a wide range of schemes we can bring a dispassionate perspective to these discussions. The Regulator is encouraging contributions which track corporate recovery, which we have only seen in a minority of schemes currently, but this latest guidance may make this approach more prevalent in future.
We agree that use of long term funding targets and sound integrated risk management is valuable. It provides a coherent framework for trustees to assess the situation and possible actions.
For a minority of schemes we work with agreeing what actions are appropriate will be a tough balancing act. For many adjustments to strategy will feel more like business as usual with more structural changes only being considered as the medium-term economic impacts of the Covid-19 crisis become clear.
We remain at your convenience to discuss further: