The Pensions Regulator (TPR) has warned pension schemes to be alert to market volatility and geopolitical risks as they decide on their endgame strategies. The regulator published its latest Annual Funding Statement, which reported that six in 10 defined benefit (DB) pension schemes are in surplus on a buyout basis.
This rose to 80% of schemes when measured on a low dependency basis, and 90% on a technical provisions basis. Ben Gunnee, TPR’s executive director of market oversight, said: “DB funding has changed dramatically, and it’s prompting trustees and employers to rethink their endgame.
“Run-on, superfund consolidation, buyout – whichever route you’re considering, the decisions you make now will shape members’ futures.” TPR urged trustees to ensure they understand the risks to investment strategies and employer covenants, “particularly as schemes move closer to their long-term objectives”.
Laura McLaren, head of DB scheme actuary at Hymans Robertson, said: “The focus now shifts to implementation, and it’s positive that TPR will publish further guidance in the coming months, including some early views on surplus use ahead of more detailed regulations.
Jon Forsyth, chair of the DB committee at the Society of Pension Professionals (SPP), agreed that regulatory clarity on endgame options was essential. He said: “Trustees will need to balance new opportunities with appropriate safeguards, ensuring that any decisions taken are aligned with member interests while reflecting the evolving legislative and regulatory setting.”
The Pension Schemes Act, which contains high-level rules for surplus release, was recently passed by MPs and members of the House of Lords. Richard Soldan, partner and head of LCP’s DB Funding Group, argued that most schemes should review their surplus policy regardless of whether or not they are actively considering running on.
Soldan said: “The way in which a potential surplus might be used could influence the endgame that trustees wish to pursue.”
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Valuations are becoming a strategic tool for schemes, with an increasing number using their triennial valuations to develop or refine their endgame strategies.
The regulator estimates that around 80% of DB pension schemes should be able to meet the “Fast Track” approach for sign-off of valuations under its new DB funding regime.
LCP’s Soldan said the regulator’s plan to review parameters around the Fast Track path indicates that it plans to set the Fast Track bar higher for less mature schemes. He added: “We would urge TPR to consider this carefully and consult with industry.”
Trustees will need guidance on scale-up fund investment to make informed decisions about their schemes’ endgames.
The ACA’s Stewart Hastie highlighted nuances in the funding level data reported in the Annual Funding Statement. TPR reported that around 60% of DB pension schemes were above 110% funded on a low dependency basis, while 20% had a funding ratio between 100% and 110%.
Tom Froggett, partner and head of DB run-on at XPS Group, pointed out that TPR’s focus on low dependency was consistent with the expected regulations around surplus release. The Pension Schemes Act has set a top-level framework for releasing surplus, and full funding on a low-dependency basis is expected to be the lower limit.
Jacob Shah, investment partner at LCP, called for the regulator to review the strategy expectations for schemes funded just above low dependency. They indicate that these schemes may typically take limited investment risk, but Shah argued that if they were aiming to run on, schemes would be unlikely to de-risk at this level.
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