Commenting on the Annual Funding Statement 2022 published today by the Pensions Regulator (TPR) Katie Lightstone, pensions partner at PwC, said:
“The Regulator has reminded trustees that the question of covenant doesn’t go away once a scheme is in surplus. As more schemes reach full funding, it will be important that trustees understand the longer term outlook for covenant given their continued exposure until schemes are run off or bought out.
“The Regulator’s references to average recovery plans being six years - or five years for stronger cohorts - is likely to drive trustees to press for shorter recovery plans. It will be important that this is balanced with a clear understanding of current market conditions, especially high inflation and supply chain disruption on the covenant and affordability.
“A big challenge for trustees assessing their covenant is that recent financial performance during the pandemic in many cases isn’t a good indicator of future performance. TPR’s focus on reviewing forecasts is helpful but given the level of market uncertainty it will be important for trustees to review sensitivities, particularly around inflation and energy prices, and potential downside scenarios.”
John Dunn, pensions director at PwC, added:
“The funding statement has highlighted how high current high levels of inflation are likely to have driven up pension schemes’ liabilities but many schemes will be protected from the full rise in inflation due to the caps applied to inflationary pension increases within many private sector pension schemes.
“TPR notes that the jury is still out on the longer term impact of Covid on life expectancy. However, it suggests that trustees could reduce liabilities by no more than 2% to reflect a view that Covid will result in a longer term headwind to further improvements in longevity. Based on the PwC Pension Trustee Funding Index, if all 5000-plus corporate defined benefit schemes decreased their liabilities by 2%, this would be equivalent to around a £30 billion total reduction.”
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