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The 2020 Valuation for the Growth Plan (GP) is currently under way; the results will help employers understand their participation in the GP further and may influence the steps they plan to take.
In this blog, Barnett Waddingham and Osborne Clarke have worked together to comment on the potential outcome of the 2020 Valuation and what this could mean for you as a participating employer in the GP.
The 2020 Valuation will calculate the ongoing funding position of the GP at 30 September 2020 and place a value on the level of surplus or deficit in the GP. If you are an employer with Series 1 or Series 2 liabilities, then the 2020 Valuation will determine the level of deficit reduction contributions (DRCs) and expenses you will be required to pay going forwards.
The 2020 Valuation will also determine the debt for each employer if you decided to exit the GP. This debt is based on a much more cautious assessment of the funding position of the GP and typically shows a larger shortfall than the ongoing funding position. This part of the calculation covers Series 1, 2 and 3 liabilities.
An employer debt is the employer’s share of the overall GP liabilities plus its share of the orphan liabilities. The debt is payable when an employer terminates their participation and leaves the GP.
The preliminary results of the 2020 Valuation are expected to be available during the first half of 2021. Once the results are provided, there will be formal discussions with the employers (via the employer committee).
2014 Valuation as at 30 September 2014:
- Ongoing funding level = 81.8%. Deficit = £176.5m
- Overall employer debt = £255.4m (75.8% funding level)
- DRCs of £13m pa (increasing at 3% pa) were agreed until 30 September 2025
2017 Valuation as at 30 September 2017:
- Ongoing funding level = 85.8%. Deficit = £131.5m
- Overall employer debt = £187.2m (81.0% funding level)
- DRCs of £11.24m pa (increasing at 3% pa) were agreed until 31 January 2025
In addition to the valuations every three years, an approximate check is carried out on an annual basis. The last of these updates was carried out as at 30 September 2019 and it showed:
- Ongoing funding level = 88.0%. Deficit = £111.9m
Source: TPT Retirement Solutions
All defined benefit schemes are different and the position of the GP will only be known once the formal calculations have been carried out by the GP’s actuary.
There are three potential outcomes:
- The ongoing funding deficit might be ahead of the expected position under the 2017 Valuation
- The ongoing funding deficit might be behind the expected position under the 2017 Valuation
- The position may be broadly similar to that expected under the 2017 Valuation
The formal valuation results will include an assessment of the reasons for any changes in the funding position since the 2017 Valuation, for example the impact of DRCs paid by employers.
All defined benefit schemes are different and the position of the GP will only be known once the formal calculations have been carried out by the GP’s actuary. However, using various funding updates and other information shared with us by TPT, we have carried out some approximate calculations estimating what the position may look like.
Based on our approximations, we estimate:
- The ongoing funding deficit might have [increased/decreased] to around £xm to £ym
- The overall employer debt might have [increased/decreased] to around £xm to £ym
- The formal valuation results will include an assessment of the reasons for the change in funding position since the 2017 Valuation, for example the impact of DRCs paid by employers.
If the position has improved then this will likely be welcomed by many employers, especially given the recent volatility in economic conditions. The extent of the improvement compared to that which was expected at the 2017 Valuation will determine whether the current DRCs remain sufficient to enable the GP to reach a fully funded position.
If the position has worsened then we would expect DRCs to need to be increased as a result. The increase in DRC demands could cause a further strain on an employer's cash-flow position in addition to those already caused by the coronavirus pandemic.
It is very important to emphasise that the comments above relate to the GP as a whole. The position for each employer will differ (potentially materially) as each employer’s share of the DRCs are based on how the liabilities for their employees compare with the liabilities of the GP as a whole. This can change significantly over time. This means that an individual employer’s DRCs can increase significantly, even if the overall deficit is falling (or vice versa).
The relationship between the ongoing funding deficit and solvency deficit will also be a consideration for employers. If the gap becomes smaller (which you would expect it to do, over time), the value of the DRCs payable by an employer will become closer to their employer debt – albeit one is payable over time, whereas the other is typically payable as a lump sum. Similarly, any widening of the position could delay any planned payment of the employer debt for some employers.
Options available to employers
In anticipation of the formal valuation results and the current economic climate, you may be considering ways to proactively manage participation in the GP. The main options available to employers are set out below.
For many employers, just “staying put” will be a completely valid and appropriate option and there is no need for you to take any action. This of course is the default position and the one on which the GP is being funded by the employers and run by TPT.
An employer will trigger its employer debt if it stops employing active members of the GP (including Series 4 members) – unless all GP employers stop at the same time. This could be due to a conscious decision by the employer, although it can also happen accidentally (if the last member leaves employment, for example).
If you decide to trigger and pay your employer debt in full, you will also have to pay TPT's cessation expenses. These are the actuarial, administration and legal costs which TPT expects the GP to incur in connection with your withdrawal.
Once you have paid your employer debt and TPT's cessation expenses you will have no further commitments to the GP. All deficit and expense payments will cease and all future liabilities will be extinguished.
You should obtain legal and actuarial advice before deciding to trigger your employer debt. There are a number of actions that you would need to consider in relation to future pension provision for your active members, the timing of steps to trigger your employer debt and the documents to agree with TPT in order to fully protect yourself against any further liability to contribute to the GP in the future.
The employer debt is very volatile and can vary significantly over time with changes in market conditions and member experience. Given the maturing of the scheme and the DRCs being paid into it by all participating employers, the ongoing and solvency funding levels of the GP are expected to improve over time. Therefore, as the GP approaches 100% funding on the solvency basis, your employer debt reduces.
In order to better understand how the funding of the GP affects your business, you could proactively monitor your employer debt on a regularl basis, possibly with the aim of paying it at an ‘opportune’ time when it is affordable for you.
This “wait and see” approach may be appropriate for many employers, as whilst paying the employer debt could be an attractive option, it comes with a potentially material cost and so could be currently unaffordable for many employers.
In addition to monitoring your employer debt, you could also take actions to try and reduce your employer debt while you continue to participate in the GP. Offering member option exercises (such as commutation exercises, pension increase exchange exercises and transfer value exercises) could be an effective way to do this.
If any members accepted these options, then it could reduce your liabilities in the GP and importantly, your employer debt. In our experience, TPT is open to discussing these exercises further. However, you should approach these exercises with care, so as to be careful not to give financial advice and to ensure you follow industry-wide guidance.
If you want to move away from the GP, but cannot currently afford to pay your full employer debt, there might be other options available to you to manage your employer debt. For example, there maybe another employer in the GP who would be willing to take on your pensions liabilities, or you are able to meet the costs of establishing a new scheme and transferring your GP assets and liabilities into it.
In the case of a transfer to a new scheme, you would still have to pay an amount relating to your share of the GP’s orphan liabilities, but this will be a much lower amount than your employer debt. You should obtain actuarial and legal advice if you are considering either option.
Orphan liabilities are liabilities for members whose employer no longer participate in the GP. That employer may have paid their debt on leaving, but this could still lead to a cost for the remaining employers if market movements mean that the original debt payment was not sufficient. Alternatively if the employer became insolvent, then some or all of the debt may not have been recovered, increasing the burden or remaining employers. The proportion of orphan liabilities in the GP will be reassessed as part of the 2020 Valuation.
There are many options available to you as employers but you will need to think carefully how the results of the 2020 Valuation will influence the steps you plan to take. You may find it beneficial to assess your position and explore the options available before the 2020 Valuation results are completed, as this will enable you to engage and react quickly as soon as the actual position is known.
About the authors
This blog was co-authored by the pensions team at Osborne Clarke LLP - specifically Jonathan Hazlett, Partner and Joe Webster, Legal Director. They have worked closely with Barnett Waddingham's Chris Hawley (biography below) to provide clear insights for this blog. Barnett Waddingham's Stephen Kyte also contributed to this blog. If you’d like to discuss any of the points raised in this blog please contact one of the authors.
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