The Pensions Regulator (TPR) published its annual funding statement today and gave its view on the market conditions that 'tranche 9' schemes will have to consider when carrying out their valuations as at dates between 22 September 2013 and 21 September 2014.
Overall, with market expectations of lower future interest rates and hence lower long term bond yields, many schemes are likely to show larger funding deficits than three years ago. Of course, the impact that market conditions will have on a scheme’s funding position will depend on that scheme’s specific circumstances, e.g. the sensitivity of benefits to inflation and the level of mis-matching between assets and liabilities.
TPR has several key messages for schemes carrying out valuations in this period. They believe that most schemes will be able to manage an increase in deficit through appropriate use of the flexibilities available within the funding regime. TPR encourages a collaborative approach between trustees and employers and notes that open dialogue is essential during the valuation process.
Trustees will be expected to be able to demonstrate that they have considered the market conditions, future asset returns, and assessment of employer covenant for their schemes when carrying out valuations. This grounding provides some assurance for employers that the valuation process will be based on factual information and can therefore be sensibly negotiated.
TPR has confirmed that trustees and employers alike can expect a regulatory approach consistent with the new funding policy, but a pragmatic approach to the extent to which they will be expected to have taken the new code of practice into account.
As anticipated, TPR will select a number of schemes for proactive engagement and these schemes can expect to be contacted by the end of this month (i.e. June 2014).