Calls for a pragmatic approach from TPR
LONDON (19 March 2020) – Aon, a leading global professional services firm providing a broad range of risk, retirement and health solutions, has said that pension scheme sponsors and trustees face difficult 2020 funding valuations, after seeing deficits for FTSE 350 company schemes rise by an estimated
£40 billion so far in Q1 2020.
As much as 15% of UK schemes have a valuation date of 31 March 2020 or 6 April 2020. That means that their valuation will be driven by the prevailing market conditions – and that could be an atypical day on the financial markets given current levels of volatility. If no action is taken now, then this potentially atypical point could lead to more difficult valuation negotiations and additional pressure on UK plc just when it does not need it.
Lynda Whitney, partner at Aon, said:
“There are plenty of levers that can be used within the legislative framework for valuations – but ultimately it’s a matter of sponsors and trustees having a grown-up conversation - preferably ahead of the end of March.
“Both sides should hold an ‘in principle’ discussion as soon as possible, which will allow them to agree to use levers they may have ruled out in the past.”
These levers could include:
- Allow for outperformance in the Recovery Plan. This may not meet the future Fast Track Funding Code test proposed in the consultation but could be a stop-gap measure or supported by contingent assets, and in a way that could still pass a bespoke regime.
- Make use of the 15-month valuation timeline to formally take into account post-valuation experience (although this has other consequences) or to informally take account of any actual rebound in the assumptions.
- Consider recovery plan structures that contain a step up in deficit contributions in recognition of short-term affordability constraints.
Lynda Whitney continued:
“This will be a really tricky round of valuations at a time when we do not know if the impact of current events on individual companies or the financial markets is short-term or long-term - and we are all trying to meet long term pension promises.”
Matthew Arends, head of UK Retirement policy at Aon, said:
"Given the levels of volatility we are seeing in asset values, we call on the Pensions Regulator (TPR) to be pragmatic when reviewing 2020 valuations. In support of this, it also needs to be clear in the 2020 Annual Funding Statement that latitude is available within the funding regime and that it can be used by trustees and sponsors to reach reasonable valuation outcomes, and that pragmatic amendments to existing recovery plans are acceptable if the sponsor has short-term affordability constraints.
"These market conditions also challenge TPR's plans for a more heavily prescribed Fast Track approach to compliance, as appeared in its recent funding code consultation. If these circumstances were to repeat when the new funding regime is in place, TPR would need to step up to the challenge and be ready to flex Fast Track quickly enough to respond to the changing environment."
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