The Pensions Regulator s annual defined benefit funding statement 2015

Transcription

1 The Pensions Regulator s annual defined benefit funding statement 2015 The implications for trustees and sponsors Graham McLean, Gareth Connolly and Bina Mistry 28 May 2015

2 Presenting today Graham McLean Phone: +44 (0) Gareth Connolly Phone: +44 (0) Bina Mistry Phone: +44 (0)

3 Agenda 1 Pensions Regulator publications 2 Key themes from the statement 3 Q&A

4 Pensions Regulator publications Graham McLean

5 A busy year for publications Already with us: Still to come practical guidance on: Annual funding statement Review of tranche 8 valuations Look forward to tranche 10 valuations Covenant assessment Setting an investment strategy Integrated risk management

6 Latest publications Expected messages Contingency planning Median increase in modelled recovery plan length is 3.5 years if current level of deficit recovery contributions (DRCs) maintained. Median increase in modelled DRCs is 66% if recovery plan length unchanged. Size of funding deficits Integration of funding, covenant and investment strategy Integration of funding, covenant and investment strategy Gilt reversion What is missing? Clearer steer on the behaviours that tpr want trustees to avoid

7 Key themes from the statement Gareth Connolly / Bina Mistry

8 Tranche 10 analysis versus key messages 2015 Statement many sponsors may be able to afford increases in contributions Tranche 10 analysis Should the average sponsor be paying more? 79% of sponsors pay DRCs that are less than 20% of dividends Source: the Pensions Regulator Source: the Pensions Regulator

9 Contingency planning We encourage trustees TPR ambitions versus commercial reality? [Contingency plans] can also help trustees and employers identify when a scheme s funding position is improving and take action, for instance change the investment strategy or to reduce employer contributions. More corporate friendly tone?

10 Yes, funding deficits are probably just as bad Source: the Pensions Regulator unless you hedged interest rate exposure.

11 Is there capacity to take on more risk? No Yes Managing deficits Affordability issues? Yes No such as a modest extension to their recovery plans, a modest increase in DRCs and/or changing their assumptions relating to investment returns Trustees may be faced with a lower level of DRCs than they think the scheme needs Seek higher DRCs with a view to maintaining the same recovery plan end date What about deficit reductions for stronger employers?

12 Lower deficit contributions? When faced with lower level of DRCs than they think the scheme needs Greater due diligence on affordability Seek additional security Seek contributions from alternative sources Ensure robust monitoring framework is in place

13 Gilt yield reversion last time It is still an option, and more flexibility allowed for than under the 2012 statement Position for schemes that made allowance last time Source: the Pensions Regulator

14 Gilt yield reversion in 2015 Trustees who wish to allow for gilt reversion in their 2015 valuation should consider their assumption in light of current expectations for interest rates, understand the implications for their schemes if gilt reversion does not occur as assumed, and consider the potential actions that could be taken

15 Contingencies possibilities? Scenario 1 - contribution differences paid into an escrow account and released if scheme s recovery plans are back on track Scenario 2 higher contributions but all moved to an escrow account as a quid pro quo, and re-assessed at the next valuation In this scenario, the employer is expected to receive a full return of the contributions from the escrow in almost 50% of circumstances by the next valuation In this scenario, it is expected the employer will receive back on average c30% of its contributions from the escrow before the next valuation is signed off Probability of escrow payments to the employer in year 4, when the scheme is expected to be fully funded on a best estimate basis What would trustees and employers prefer? 60% 50% 40% 30% 20% 10% 0% 52% 30% 18% Full return Partial return No return Based on the assumptions underlying the Towers Watson Global Asset Model Based on a model scheme

16 Sustainable growth plans...if investment in an employer s business is being prioritised at the expense of such contributions, it is important that this investment is being used to improve the employer s covenant. Trustees should seek to understand what the employer is looking to achieve, how these plans will benefit the covenant and how and when growth will fund increased contributions to the scheme where necessary. The scheme should be treated fairly for example, through dividend blocks or restrictions.

17 Other points to note Post valuation events Will they help? DB to DC transfers Lots of implications

18 Graham McLean Phone: +44 (0) Gareth Connolly Phone: +44 (0) Bina Mistry Phone: +44 (0)