Commenting on TPR’s Annual Funding Statement 2023, Laura McLaren, Partner at Hymans Robertson says:

“Significant improvements in DB funding means the 2023 Annual Funding Statement speaks much more to schemes that are well-funded and increasingly close to buy-out. TPR estimates that around a quarter of all DB schemes may now have sufficient assets to buy out their liabilities with insurance companies. This marks an important shift for TPR and schemes as a whole. Overall, the tone of this year’s statement is notably more (cautiously) upbeat than we’ve seen in recent years dominated by COVID-19 and the outbreak of the Russia / Ukraine conflict.

“The focus for many valuations will be quite different. Whereas past messaging has centred on technical provisions and repairing deficits, it's helpful to see TPR encouraging trustees’ thinking on long-term planning, protecting gains and getting buy-out ready.

“Whilst there are many references to buy-out, TPR goes further in discussing the range of endgame options than we’ve seen to date. Even uses of surplus and consideration of discretionary increases warrant a mention. Acknowledging that running on a scheme could be a valid choice will be encouraging for a minority, although buy-out will remain compelling for schemes as funding levels continue to improve. Detailed preparation and a robust market approach will be paramount in what’s expected to be a busy market.

“Helpfully, TPR has overlaid the tables copied over from previous statements, aimed primarily at schemes which are still underfunded, with more specific guidance about what it expects across a more nuanced range of circumstances for UK schemes and the businesses supporting them. Notably from schemes at or approaching buy-out through to those that might have seen hedges cut back and/or funding dip when gilt yields spiked in September.

“In an echo of recent guidance, TPR homes in on investment issues with sensible nods to accelerate de-risking plans if affordable, review liquidity and ensure robust LDI arrangements. Trustees should be careful to think about strategies holistically. Whilst we support the steer to get assets ‘buy-out ready’ we note there’s a difference between holding assets that insurers prefer versus holding assets that hedge insurer pricing. The two risk being conflated into the same thing.

“Set against a challenging macro-economic environment for employers, we’re also supportive of the overarching message not to be complacent about employer covenant. The comments around refinancing risk point to a very live issue for employers that are highly leveraged or in a weaker financial position. If businesses are in distress, trustees can expect TPR to intervene.

“On liability assumptions, longevity is noted as still needing particular attention. Whilst TPR stops short of endorsing any particular adjustments relative to pre-COVID expectations, many schemes will look to the CMI 2022 annual mortality projection model. This could shave up to 2% off funding liabilities compounding recent gains.

“Finally, TPR’s new funding code of practice only gets the briefest of mentions and there is nothing more on the timing of next steps given the delay announced earlier this month. For those with valuations now it’s unhelpful to need to agree a funding framework without understanding how that is likely to work under the new code. Though for those accelerating buy-out insurance plans, this will increasingly be a less pressing concern. It remains to be seen if and how the changes over the last 12 months will have a bearing on the regime we ultimately see coming into force.”

Commenting on the risk transfer implications, James Mullins, Head of Risk Transfer at Hymans Robertson, says:

“TPR recognises that around 25% of pension schemes may now be able to afford to fully insure. This is a dramatic shift from the position just a year ago and is the reason why the buy-in market will be so busy during 2023 and beyond. Pension schemes looking to complete buy-ins need to reflect this busyness by adapting their broking processes. For example, our experience is that small schemes can get excellent results by partnering exclusively with a chosen insurance company and larger schemes should consider focussing on a carefully thought through shortlist of insurers.”