Recent corporate failures drive Regulator’s annual address

Alan Collins

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It did not take Holmes-ian powers of deduction to pick up the influence of recent corporate failures in the Pensions Regulator’s annual funding statement that was issued on 5 April.

The annual “state of the nation” address on funding of Defined Benefit Pension Schemes made clear the disquiet from the Regulator that dividend payments were increasing but deficit contributions were not. The statement stresses the need for trustees to ensure “fairness” for their schemes relative to corporate shareholders/stakeholders. Where employers are strong, trustees should be “looking to fix the roof while the sun is shining” if you like. The Regulator has (pleasingly) avoided the temptation to try and fix parameters against which trustees should judge fairness. The current regime is founded on flexibility and I do hope this continues. Recent implications (in the Government’s White Paper) that greater direction/restriction is coming has me fearing a return to the days of a set Minimum Funding Requirement. The last attempt at MFR didn’t work and was quickly swept aside. I suspect that any attempt to turn back the clock on this would meet a similar fate.

There was also a reminder that dividends are not the only target, with the introduction of what might become a buzz-phrase – “covenant leakage”. This is really a catch-all phrase to describe any route by which the security of the scheme’s position is damaged by corporate activity. For me, this points strongly towards trustees drawing up and monitoring some key indicators to monitor company performance and company strength and take action to prevent deterioration or react swiftly if there is a change. And remember, it can be just as important for trustees to react when their sponsor’s position improves, allowing the scheme to share in this success and put their scheme on to a stronger footing.

The statement contained further “hints” that some trustee boards are not sufficiently well-equipped to tackle complex funding and investment issues. Trustees are expected to seek appropriate advice, especially where the board does not have the sufficient expertise or where potential conflicts exist.

Many other themes in the 2018 statement were follow-ons from 2017, such as the prominence given to the importance of contingency planning.
One part I struggle with is the continued highlighting of “Brexit uncertainty”. Yes, we know there is uncertainty. However, if the Government doesn’t know what is going to happen, the markets don’t know what is going to happen, advisors don’t know what is going to happen, then what chance do trustees have? I fear that trustee resources could be diverted in speculative discussions about future scenarios rather than focussing on more measurable, controllable risks.

Alan Collins

Post by Alan Collins

Head of Trustee Advisory Services at Spence he provides actuarial, funding and investment advice to trustees and sponsors of ongoing defined benefit schemes.

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