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United Kingdom: Shareholder distributions among issues covered by annual Pensions Regulator statement

Pension Board and Trustee Consulting|Pensions Corporate Consulting

March 26, 2019

U.K. plan sponsors should consider the annual Pensions Regulator statement expectations, particularly with regard to defined benefit funding.

Employer action code: act

The Pensions Regulator (TPR) recently published its annual defined benefit (DB) funding statement, which is relevant to trustees and sponsors of all private sector DB pension plans.

Key details

TPR notes in the DB funding statement that:

  • It is concerned that shareholders may be given preferential treatment over plans and expects that:
    • Where dividends and other shareholder distributions exceed pension plan deficit repair contributions (DRCs), there should be a strong funding target and a relatively short recovery plan.
    • If the employer covenant is, or could become, weak, it expects DRCs to be larger than shareholder distributions, unless the recovery plan is short and the funding target strong.
    • If the employer covenant is weak and unable to support the plan, it expects shareholder distributions to cease.
  • It expects all plans to consider their longer-term strategy for delivering benefits and set a consistent long-term funding target (LTFT). Plans should be prepared to prove that shorter-term investment and funding strategies are aligned with their LTFT. For instance, it cites reducing a plan's dependence on the employer at a particular maturity level so that the plan can then be managed to be more resilient to investment risks.
  • It expects trustees to account for risks that arise from plan maturity, because this can affect risks that need to be managed, especially investment volatility.
  • It will be rolling out a new regulatory model to improve its effectiveness by more directly engaging plans. In summer 2019, it will consult on various options for a revised funding framework and shortly afterward will consult on a revised code of practice for funding defined benefits.
  • The funding statement is relevant to both plans undergoing actuarial valuations and those undergoing significant changes that require a review of their funding and risk strategies.
  • It expects all funding and risk reviews to fully incorporate the principles in its separate DB code of practice and associated guidance, particularly those principles addressing funding, investment, employer covenant assessment and monitoring, and integrated risk management.

Employer implications

Plan sponsors should consider TPR’s expectations, particularly regarding DB plan funding, M&A activity where a DB plan is affected and shareholder distributions from entities sponsoring DB plans.

For those of you who were unable to join us on our recent webcast, "The Pensions Regulator's annual DB funding statement 2019 — The implications for trustees and sponsors,” a replay is available upon registration.

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