Pensions legislation requires trustees of schemes providing money purchase benefits (subject to some exceptions) to have in place a Statement of Investment Principles in relation to the default arrangement which must cover matters including the aims and objectives of the trustees in respect of the investments and their policies in relation to certain matters (together known as the “default strategy”). The legislation also requires the trustees to review the default strategy and the performance of the default arrangement at least every three years or without delay after any significant change in investment policy or the demographic profile of members. On 11 June the Regulator published a press release reporting on a new drive to ensure that trustees are meeting these review obligations. The Regulator reports that it has contacted more than 500 schemes with between two and 999 members as part of the pilot asking them to complete a simple online declaration form to confirm whether their strategy and performance of the default arrangement have recently been reviewed and remain suitable. If a recent review has not taken place, the trustees will be taken through simple steps to comply with the law. The Regulator states that walking trustees through complying with their requirements is a new approach that it is taking “for engaging with the most hard-to-reach trustees while also driving up standards of governance”.
On 25 June the Regulator published a press release reporting on the first speech given by its new Chief Executive – Charles Counsell – since taking up the post in April in which he outlined how he will deliver the Regulator’s goals and priorities. The press release notes that the Regulator is “currently going through significant change in the way it regulates” and that by working proactively with more schemes through a new range of approaches, it is “clearly setting out its expectations, understanding the impact of any risks on savers and taking tough action where necessary”.
Also in June, the Work and Pensions Committee announced that it has opened a new, dedicated strand of work on the Pensions Regulator’s priorities and approach with the inquiry starting on 26 June 2019 when the Committee questioned the Regulator’s new Chief Executive.
Scheme Funding Analysis
In June the Regulator published the 2019 update to its annual funding statistics for DB and hybrid schemes. The update is based on Tranche 12 schemes which are those with effective valuation dates falling between 22 September 2016 and 21 September 2017. The underlying data for the update is sourced from valuations and recovery plans submitted to the Regulator by schemes in deficit and from annual scheme returns for schemes in surplus. Key findings in the analysis include the following.
• The average ratio of assets to technical provisions for Tranche 12 schemes in deficit and schemes in surplus is 88.5%. The average ratio is noted to be generally higher for schemes that report liabilities in respect of active memberships, with stronger covenants (for schemes in deficit), without a contingent asset, and with shorter recovery plans.
• The average recovery plan length for Tranche 12 schemes in deficit is 7.3 years. Tranche 12 recovery plan end dates exceed those of Tranche 9 by two years at the median. Longer recovery plans tend to be associated with schemes with weaker covenant support, and with a greater allocation to return-seeking assets which the Regulator notes may reflect de-risking among schemes with better funding/relatively shorter recovery plans.
• As a proportion of liabilities calculated on a technical provisions basis, average annual deficit reduction contributions (DRCs) for Tranche 12 schemes are relatively unchanged at 2.1% compared to 2.2% for Tranche 9 schemes at the median
• Less than a fifth of Tranche 12 schemes have additional security in the form of one or more contingent assets, with less than a tenth of schemes having contingent assets that are formally recognised by the Pension Protection Fund in the calculation of its risk-based levy. The Regulator states that the presence of contingent assets is associated with larger schemes and weaker covenant support.