Commenting on TPR’s Annual Funding Statement 2021, Laura McLaren, Partner, Hymans Robertson says:

“With many of the themes familiar from recent TPR guidance, nothing in today’s Annual Funding Statement should come as a huge surprise to trustees and employers. However, TPR outlines how defined benefit schemes should approach 2021 scheme valuations. As consultation on the new DB funding code continues it’s the best indication of how scheme funding will be regulated in the short term and what will attract scrutiny.

“Markets have managed to look past the immediate COVID-19 disruption. Nevertheless, whilst most pension schemes have emerged from 2020 relatively unscathed in funding level terms, the fallout is still likely to be uncertain for some time. With industries and employers affected unevenly, and some hit particularly hard, sponsor covenant and affordability look set to be the factors that will split the valuation pack. Against this backdrop, it’s no surprise to see these being given particular prominence. Each scheme will need to consider its position individually and the importance of a robust audit trail and supporting evidence is mentioned several times.

“TPR is trying to strike a delicate balance between providing protection to members and enabling employers to focus on their business without overly burdening them. For many employers, the last thing they want to deal with after the last twelve months is a pension scheme valuation. Nevertheless, TPR remains apprehensive about companies putting off contributions and exposing members’ benefits to unnecessary risk. Trustees are going to need to be in a position to demonstrate to TPR that the risks they are running can be supported by the business their scheme relies on, that the scheme is being treated fairly and that they’ve explored all appropriate mitigations. Some ideas that were perhaps ‘off the table’ three years ago – such as non-cash security, contingent cash solutions and commitments to the treatment of the scheme compared to other stakeholders – may hold more attraction as companies look for ways to preserve cash.

“Beyond managing covenant impacts, there are some warnings to trustees to take care if building in ‘off market’ inflation adjustments, allowing for post COVID longevity gains that might not materialise or ignoring climate risk.

“Above all, TPR is clear that the focus should remain on long-term planning and risk management. With so much uncertainty surrounding investment markets, covenants and mortality rates, robust contingency planning will be key. Schemes which are fortunate to find themselves in a period of relative calm and recovery would be wise to take the opportunity to revisit long term plans and strategy, making sure these are fit for purpose and considering what actions could be taken to ‘lock-in’ recent gains and avoid any material deterioration.”