Without Guarantees, More Cash for Pensions is Required Sooner AND Later
The Pensions Regulator’s funding statement requires pension schemes to be funded to a level at which they are financially independent of their corporate sponsor – ASAP. Pension Sufficiency Guarantees backed by leading banks and insurers can help achieve the new target.
“The Pensions Regulator spells out its expectations clearly. Long term funding targets have to be put in place. Corporates should respond positively. Move decisively to a defensible position. Protect members and look after your cash. All is achievable through third-party, risk diversifying guarantees. Banks and insurers are ready to make it happen. (Corporates’ New Pension Funding Dilemmas. Problem: Solution: Action Plan)” William McGrath, Founder C-Suite Pension Strategies
The Pensions Regulator – Annual Funding Statement March 2019: A Summary
The objective of a defined benefit scheme is to pay the members benefits when they fall due. To achieve this the trustees and employer need to agree a long-term funding target (LTFT) which is self-sufficiency described by TPR as follows;
This target would, for instance, be for the amount of assets the scheme would need by the time it has reached a level of maturity when it would be prudent to reduce the scheme’s dependence on the employer, in order to allow it to be managed thereafter with a high degree of resilience to investment risks.
In the meantime;
Investment and funding strategies in the interim period are then aligned to the LTFT via journey plans which look beyond becoming fully funded on a TPs basis, to becoming fully funded up to the LTFT.
Thus, TPR is now expecting DB schemes to be funded to self-sufficiency and as quickly as possible.
The length of the recovery plan relative to the level of deficit, the strength of the employer covenant, and the scheme’s maturity. Our data indicates the median recovery plan length to be seven years, so we take the view that the schemes with strong covenants should generally have recovery plan lengths which are significantly shorter than this.
the important consideration is the interaction between (a) the level of assets, the degree of underfunding and the amount of benefits paid out, and (b) the scheme’s ability to close the funding gap from investments and new contributions in a reasonable timeframe.
Strengthen TPs, increase DRCs and reduce recovery plan lengths.
Also, TPR has concerns about equitable treatment for the pension scheme
The steps taken by trustees to challenge covenant leakage and secure a fair deal for the scheme.
Where dividends and other shareholder distributions exceed DRCs, we expect a strong funding target and recovery plans to be relatively short.
However, TPR does acknowledge that it may be appropriate to introduce “external” funding into the equation.
Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan
consider using escrow, asset-backed contributions (ABCs), and contingency planning
in addition to enhancements to the recovery plan, strengthen short-term security through other means such as contingent assets and guarantees where available.
priority being to protect the scheme and employer from further downside while improving funding position by further cash and/or contingent assets
Consider non-cash funding options, eg ABCs, guarantees to strengthen security
TPR is also able to consider Group support.
Where employer is part of a stronger group, seek wider group support through cash and non-cash support
with a greater focus on securing wider group support where available
trustees consider that further support is possible (from the employer or wider group)