The Pensions Regulator (TPR) has set out its areas of focus for the next three years in its 2016 Corporate Plan. We analyse the key issues for employers below.
Funding deficits in hard times
"TPR suggests that companies with DB schemes should prepare for the current climate of low interest rates and modest economic growth to continue."
The economic environment has been tough recently, and TPR remains acutely aware of this. Encouragingly it has acknowledged that many sponsoring employers could find themselves constrained in what they can afford to pay in to their defined benefit (DB) scheme.
TPR points out that many schemes are sponsored by employers in sectors like manufacturing, which are experiencing slower growth than services sectors. As part of actuarial valuations, employers will need to help trustees understand the employer’s financial position. The employer is likely to benefit from getting involved in the valuation process at an early stage.
TPR suggests that companies with DB schemes should prepare for the current climate of low interest rates and modest economic growth to continue. DB schemes that may be looking at increasing the risk in their investment strategy in pursuit of higher returns have been warned by TPR that any such approach will depend on whether the employer would be able to meet an increased deficit in the event of the investments not performing as expected.
The Regulator’s annual funding statement gives more detail on its expectations for deficit recovery plans. We will update you on this shortly.
Automatic enrolment: comply or face the consequences
Over the next three years, the very smallest employers face the challenge of implementing automatic enrolment. Selecting a pension scheme can be particularly difficult for these employers, who may have no in-house pensions knowledge.
TPR views failure as a grave matter and is increasingly using its powers to issue escalating fines to non-compliant employers.
Other employers, too, will be under TPR’s scrutiny as they come up for their triennial re-enrolment.
Are DC Master Trusts secure?
"While master trusts may be attractive on cost grounds, employers should be aware of the risks of the particular type of scheme they are considering."
'Master trust' arrangements, under which an employer sets up a section within a large multi-employer defined contribution (DC) scheme, have become increasingly popular. 55% of DC members are now in the four largest master trusts. TPR recognises there is a risk that if just one of these schemes were to collapse, a significant number of members could potentially lose their savings.
As mentioned above, selecting a pension scheme can be difficult. While master trusts may be attractive on cost grounds, employers should be aware of the risks of the particular type of scheme they are considering.
TPR’s master trust assurance framework might give some comfort to employers looking to use one of these schemes. TPR now plans to review this framework to strengthen the governance of such schemes. We also expect the Government to announce it will legislate in this area.
TPR aims to target its powers at the greatest risks. As highlighted by recent events, corporate activity can impact strongly on the employer’s covenant, and therefore the security of DB pensions. Employers can expect trustees, and TPR, to take increased interest in this area.
Employers should be aware of how the trustees might view the announcement of a large dividend, or merger and acquisition activity. Employers can also seek clearance from TPR if they are considering a corporate transaction. This will give the employer assurance that TPR will not use its powers in relation to that transaction.
Rowan Harris contributed to the writing of this blog post