LONDON (30 April 2020) – Aon, a leading global professional services firm providing a broad range of risk, retirement and health solutions, has said that despite the guidance outlined in the new Annual Funding statement from the Pensions Regulator (TPR), the full flexibilities of the current funding regime will be required for 2020 valuations of UK pension schemes.
There are many similarities between the Annual Funding Statements of 2019 and 2020, with the examples still divided by maturity, covenant strength and funding position, as well as the expectation that schemes still focus on long-term funding targets. However, there is the additional overlay of COVID-19 related guidance and its focus on fairness.
Matthew Arends, head of UK Retirement Policy at Aon, said:
"This year’s Funding Statement comes out at a point when UK pension schemes - like every area of UK business - are becoming aware of the full implications of this unprecedented time. It is very clear that every scheme and its sponsor face very different situations, with widely differing impacts on scheme funding levels and employer covenant strength.
“From a practical perspective, this is a time when schemes with 2020 actuarial valuations can press on with data collection and calculations regardless of these differences – but Aon would advocate that they then step back from past valuation policies and re-assess the situation. If necessary, they can form interim views on covenant strength and affordability, before reviewing all the conclusions at the time the valuation is completed."
Matthew Arends continued:
"Ultimately, TPR appears open to schemes with 2020 valuations using the full range of recovery plan flexibilities that are available to deal with widening deficits, although they appear to favour some options over others.
“For example, this includes encouraging contingent contributions that increase as the sponsor recovers. We expect the full range of flexibilities may be required, including back-end loaded contributions supported by either contingent assets or contingent contributions, the extension of Recovery Plans, and outperformance in Recovery Plans.”
Matthew Arends continued:
"We support the TPR’s view that there are sufficient flexibilities available that do not require the Valuation Date to be moved. Although we agree with the principle of considering post-valuation experience, there are practical difficulties to allowing for this directly in the Recovery Plan that can cause difficulty at the time or later – so it isn't a silver bullet.
“We recommend that post-valuation experience is taken into account informally, for example in the level of outperformance in the Recovery Plan that the trustees are comfortable with."
While there is extensive comment on the importance of the employer's covenant, this contrasts with the funding code consultation where employer covenant is downplayed significantly.
Ryan Cox, senior covenant adviser at Aon, said:
"For many schemes, the impact on covenant will be far more challenging than the change in funding position. Many trustees will have very limited certainty of the sponsor’s longer-term financial position - and in these cases it’s important that they engage regularly with the sponsor. While the covenant conclusion can be finalised later in the valuation process, trustees need to consider now what actions they can take if visibility doesn't improve or the covenant deteriorates further."
Kate Charsley, partner at Aon said:
"The Annual Funding Statement includes no new information in relation to investment matters – it largely refers to previous guidance and continues to encourage trustees and employers to have a strategy in place for agreeing a long-term funding target. However, the changes to market conditions mean there is currently much that trustees should consider within this framework.
"Market volatility and, for many schemes, deterioration in covenant and funding position, should prompt a review of the appropriate level of risk and return, and the expected path to long-term funding. We also expect more schemes to focus on the guidance on portfolio liquidity - many assets are at depressed values, while the stressed conditions in March illustrated the impact this can have on the costs of trading. Recent market movements have also opened up new opportunities in investment markets, meaning the time may be right for changes to portfolio structure.”
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