Laura McLaren, Partner at Hymans Robertson comments on the Pension Regulator's Annual Funding Statement for 2020

"It’s no surprise that COVID-19 is a major theme for this year’s annual funding statement.  However, whilst trustees and employers will need to work together to manage the immediate impact, the Pensions Regulator (TPR) is clear that the focus should remain on long-term planning and robust risk management.  TPR has been trailing these messages for some time and they’re very consistent with the direction of travel for the new DB funding code. 

"March and April 2020 valuations will be challenging.  However, I’d encourage trustees to use the time and flexibility in the funding regime to navigate the prevailing market conditions and uncertainty.   

"The timing and shape of any COVID-19 rebound will be highly dependent on both containment of the virus and the effectiveness of policy responses.  We therefore support the emphasis on testing different potential future scenarios as a key tool to inform decisions, assess risks and implement meaningful contingency plans.  Conversely, if schemes are looking for quick fixes (for example by changing valuation dates) or trying to cherry pick post-valuation experience they should expect scrutiny. 

"By once again segmenting businesses and schemes into categories, TPR is able to be more directive about what it expects.  Schemes will have fared differently, depending on how well funded they were at the start of the crisis, their investment strategy and also their level of hedging.  With some companies and industries being hit harder than others, sponsor covenant and affordability will be key. TPR has been consistent in advocating fairer treatment for pension schemes relative to shareholders for some time.   However, with many trustees being asked to support the sponsor over a difficult, but hopefully temporary, period, it is particularly key that equitable treatment is maintained throughout any recovery.  As a result, we should expect to see more triggers and ‘upside sharing’ mechanisms – to ratchet up cash when trading/conditions return to normal – being built into funding and risk management plans.  Security over assets, guarantees and underwriting investment performance are other levers trustees and sponsors might look at to deliver better member security."