TPR: Improved funding steering DB sector towards buyout

The findings, from the Pensions Regulator’s 2021 annual research survey of trust-based occupational DB pension schemes, comes amid industry worries that the insurance market lacks the necessary capacity to process the spooling number of fully funded DB schemes.

The survey was carried out between October 2021 and January 2022, comprising interviews with 265 trustees of DB schemes and 138 employer representatives, prior to recent market turbulence.

TPR’s research also shows that as of March 31 2020 there were around 5,600 DB schemes that together had a membership of 10.7mn people and held £1.7tn in assets.

In the background, we are also building the systems and processes we need to regulate compliance [for dashboards], because not being ready in time for implementation will ultimately have consequences

Charles Counsell, TPR

Funding dominates long-term objectives

The primary influence on schemes’ long-term objective was the overall funding position, with 81 per cent of trustees and 80 per cent of employers describing this as a key factor in the route they opt for.

This was followed by the employer covenant, chosen by 56 per cent of trustees and 64 per cent of employers, and scheme maturity, selected by roughly half of both parties.

Notably, two-thirds (68 per cent) of trustees with a long-term objective said this drove the funding of the scheme, rather than being a purely aspirational target. Micro and small schemes were comparatively more likely to indicate that the goal was purely aspirational.

The majority of both trustees (69 per cent) and employers (56 per cent) hoped to reach their long-term objective within 10 years, while 26 per cent and 20 per cent respectively are seeking to do so within five.

But flexibility in the objectives and targets of this goal has been baked-in by most. Nearly three-quarters (71 per cent) of schemes had a defined process for reviewing or changing their long-term objective, while half said they reviewed or changed it on a regular basis.

Four in five schemes supplement their long-term objective with a journey plan, equating to 70 per cent of all schemes. Typically, journey plans were aligned with the technical provisions and investment derisking, while three in four said they had a defined process to review or change the journey plan.

Respondents noted that alterations to the journey plan could be triggered by the funding level not meeting projections, changes in the long-term objective and to the covenant.

Covenant risk was considered “to a great extent” by half of all trustees when setting the recovery plan, with slightly lower proportions doing this when setting the investment strategy, the long-term objective and the technical provisions. In most cases, monitoring of the covenant was tightly linked to the journey plan.

When structuring their recovery plan, trustees were most likely to have considered the affordability of the employer’s contributions and the maturity of the scheme, but only two-thirds considered the likelihood of employer insolvency, while half took into account the value, terms and enforceability of any contingent security. A quarter of trustees had agreements in place for additional contingent payments to be made by the employer.

Meanwhile, half of all schemes had an endgame investment strategy, and a similar proportion had derisking funding triggers.

But overall, there are few concerns about risk management within schemes. 95 per cent felt that the information received from the employer was sufficient for good risk management and 97 per cent were confident they could document and articulate their approach to risk management, with appropriate evidence.

Preparing for the future

Consolidation is an area of ambiguity for schemes, with many respondents unsure whether or not TPR was supportive of superfunds and consolidation, with around one in five trustees and employers eyeing consolidation as an attractive option for their scheme.

Micro, small and medium schemes were more attracted to consolidation than large ones, primarily due to the reduced covenant and funding risks as well as reduced costs.

Among those schemes interested in consolidation, the most attractive model was master trusts, with 58 per cent of trustees and 67 per cent of employers saying it appealed to at least some extent.

This was followed by superfunds — 44 per cent and 59 per cent — while streamlined advisory models were seen as the least appealing option.

The survey also asked medium and large schemes about pensions dashboards. 14 per cent of trustees were not aware of pensions dashboards, and a third were not aware of the change in pensions law requiring them to provide data to savers through the dashboards.

Some 41 per cent had heard of the Pensions Dashboards Programme team established by the Money and Pensions Service to develop the technological infrastructure behind the dashboards.

Awareness of dashboards and their regulatory needs was higher among large schemes than medium schemes, yet most schemes had not yet taken action to prepare for the dashboards, although some were planning to do so within the next six months. The most widespread actions were undertaking work to clean or update their data, although this has already been done by 46 per cent of schemes.

But schemes have been warned that not being ready for the implantation of dashboards will have consequences.

Speaking at the Pensions and Lifetime Savings Association annual conference earlier in October, TPR chief executive Charles Counsell said the regulator is writing to all schemes at least 12 months ahead of their pensions dashboard deadlines, while it fleshes out the systems and processes needed for the platform.

"In the background, we are also building the systems and processes we need to regulate compliance, because not being ready in time for implementation will ultimately have consequences," he noted.

Regulatory readiness

Elsewhere on the regulatory front, almost nine in 10 trustees were aware of TPR’s new criminal powers made by the Pension Schemes Act 2021, and half were aware of the new employer insolvency and employer resources tests for contribution notices.

Half of trustees were aware that TPR would soon introduce a new single code of practice, but this varied widely by scheme size, ranging from 37 per cent of micro and small schemes to 78 per cent of large schemes.

The majority of those aware of the single code said this would make it easier to understand TPR’s expectations and improve how their scheme was governed.

However, 59 per cent also anticipated that the new code would increase the work required by their scheme to meet these expectations.

The ability for schemes to allocate time and resources to assessing financial risks related to climate change varies depending on the size of the scheme, TPR also found.

Only a quarter of micro and small schemes had looked into climate-related risks, while half and 78 per cent of medium and large schemes had done so, respectively, marking no change from the findings of the 2020 survey.