Pension scheme funding
in the current environment
ACA Sessional Meeting
Tim Keogh FIA/Chinu Patel FIA
13th June 2012
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Objectives
•
Provide more insight into our thinking behind the Annual Funding
statement
•
Explain how the statement should help trustee and employers facing the
challenge of current difficult conditions
•
Clarify our expectations from trustees
•
Clarify what trustees can expect from us
•
Q&A
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Our regulatory model
•
Balancing strategies for funding, risk and member security in a
risk-focussed and proportionate manner
Risk
• How much risk in funding and
investment strategies?
• How is it financed?
• How is it supported?
Funding
Covenant
Our expectation from trustees, based on the practical experience of the SSF
regime over two full cycles is for a business plan which brings together these 3
strands in a coherent manner.
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
A re-statement of our earlier guidance
•
Technical provisions
– Primary measure of liability
– Not to be compromised to make recovery plan affordable
– Embedded risk should depend on available sponsor support
•
Recovery plans
– Determined by reasonable affordability to sponsor
– Flexible in design and (within reason) length, to deal with individual circumstances.
– Can be supported by non-cash elements
•
Investment risk when used as a financing tool
– Must take account of available sponsor support (which may be volatile over time)
– Trustees should have realistic plans of how the sponsor will provide additional support if
expected returns are not realised whilst there is still time.
•
Sponsor support
– Numerous forms, some more accessible than others
– Can be volatile and may erode quickly
– Needs regular monitoring and clarity about actions that would be taken and in what
circumstances
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Current context: difficult financial conditions
•
Aggregate position of all schemes covered by April statement estimated to be as
follows (blue) and compared with PPF7800 index for same schemes (green).
"UK plc" funding development 2008 - date
PPF basis changes
100
T3
T4
T5
CPI
T6
T7
Surplus/(deficit) GBPbn
50
• Expect most deficits to be worse than
3 years ago
0
-50
• Volatile markets = Volatile deficits
-100
-150
• Scheme specific variations depending on many individual factors
-200
-250
Mar-12
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
Dec-09
Sep-09
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
-300
Month end
TPs (in blue line) defined as gilts plus same outperformance
as at previous valuation
Limitations to our data makes this suitable for big picture
analyses only.
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Sources of deficit
-300 -200 -100
0
100 200 300
• Some respite from CPI saving
Initial deficit Mar10
• Contributions, despite being at
record levels, neutralised by net
investment and other misc losses
CPI saving
3 years' DRCs
• But significant loss from having
to mark to current market
Equities underperform
Yields fall
• March 2012 deficits smaller than
Dec 2011(and attribution to
individual factors may be
different)
Misc
Deficit Dec11
31.3.12 update
Warning: This is aggregate analyses based on highly summarised data and may not be
representative of individual schemes whose results will depend on many scheme specific
factors.
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Current financial conditions: the scale of the problem
Scenario projections - UK plc aggregate TP basis
TP surplus/deficit £ bn nominal
300
200
100
-
Gilts flat
-100
Gilts+50bps
Aggregate deficit
-200
Year
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Mar-22
Mar-21
Mar-20
Mar-19
Mar-18
Mar-17
Mar-16
Mar-15
Mar-14
Mar-13
DEC-11
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
-300
Current financial conditions:
a new norm or a temporary aberration?
Scenario projections - UK plc aggregate TP basis
Existing contributions + RPI in future No change to return seeking asset proportion for 10 years
TP surplus/deficit £ bn nominal
300
200
Gilts flat
Gilts+50bps
100
Yield reversion
No yield reversion
-
-100
-200
Year
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Mar-22
Mar-21
Mar-20
Mar-19
Mar-18
Mar-17
Mar-16
Mar-15
Mar-14
Mar-13
DEC-11
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
-300
Current financial conditions: other ways of getting there
Scenario projections - UK plc aggregate TP basis
Existing contributions + RPI in future No change to return seeking asset proportion for 10 years
TP surplus/deficit GBPbn
nominal
300
Gilts flat
Gilts+50bps
Optimistic
Yield reversion
No yield reversion
Pessimistic/de-risk now
200
100
-100
-200
31.3.12 update?
Year
Which one will it be?
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Mar-22
Mar-21
Mar-20
Mar-19
Mar-18
Mar-17
Mar-16
Mar-15
Mar-14
Mar-13
DEC-11
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
-300
Coping with current conditions: TPs
•
A reminder that legislation requires trustees to take a prudent approach towards
setting TPs, regardless of market conditions
•
We therefore expect trustees to hold the strength of their TPs
•
Smoothing TPs not consistent with asset valuations; volatility needs to be managed
not hidden
•
There is flexibility to cope with volatility and other aspects of the current financial
landscape in the design of recovery plans
•
If trustees have a strong view about what may be ‘normal’, and they want to factor it
explicitly in their funding plan, then our preference is for this to be done in the
recovery plan assumptions, together with a documented contingency plan
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
The power of recovery plans
-300 -200 -100
0
100 200 300
Initial deficit Mar12
Discount rate unwind
Contributions current + RPI
Short term yield reversion
10 years' prudence unwound
TP Surplus Mar22
31.3.12 update?
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
• Ultimately DRCs are the most
important
• Views about future economic
scenarios may or may not be
realised, and could hamper
return to solvency unless
underpinned by suitable
contingency plans
• That is why we are encouraging
trustees to focus on the flexibility
of recovery plans to cope with
current conditions
Future recovery plans: our expectations
•
Guiding principle: reasonable affordability without compromising sponsor’s viability
•
In general we expect contributions to be maintained in real terms or increased in
line with business performance
•
Higher increases if previous level of contributions was low relative to what the
sponsor could have afforded
•
Servicing debt and capex are essential elements of strong businesses – should be
seen to be improving sponsor covenant
•
When cash leaves the company the pension creditor should receive an equitable
share
•
Reassess dividend payments where there is a substantial risk of pension obligations
not being met
•
If affordability is reduced longer recovery plans may be acceptable but justification
needed for material extension
•
Trustees should document the justification for any reductions – good governance
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Impact vs affordability
High
Scenario 2
Covenant/
Affordability
Scenario 1
Low
Scenario 3
Nil
Polestar
Worsened
Uniq
little change
Improved
Impact on scheme
(=need for contribution change or equivalent)
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Managing T7 valuations
Scheme issues
Pro-active
Risk
Cash
TPR process issues
Covenant
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Targeted
Segmented
The Pensions Regulator: process
•
Pro-active
– More interested in early engagement
•
Pro-active
Targeted on key risks
– These are
• Covenant
• Investment
• Inadequacy of contributions
– TP/RP length is means to an end only
• Evolve triggers to better address key
risks
Targeted
Segmented
•
Segmented
– Increasingly discriminate between different
situations in terms of our approach
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Current recovery plans (T4): bird’s eye view
Range of contributions and funding level
Tranche 4 (excluding outliers)
Contributions as % reference
liabilities
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
40%
50%
60%
70%
80%
Funding level as % reference liabilities
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
90%
100%
Current recovery plans (T4): a closer look
Contributions as % reference liabilities
Range of contributions by funding level decile
Showing 5th/25th/75th/95th percentile for each decile
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Median contribution
Median funding level
Decile
3.2%
2.7% 2.9% 2.5% 2.1% 2.2% 2.2% 1.6%
1.6%
0.9%
2.2%
43%
50% 53% 56% 59% 63%
1
2
3
4
5
6
66%
70%
75%
88%
61%
7
8
9
10
All
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Managing T7 valuations
Trigger developments we wish to explore
Scheme issues
Risk
Funding
•
Contributions vs TP/RP length
•
Surplus declarations
Investment risk
•
RBL
•
VaR
•
ABCs
•
Flight paths
Covenant risk
Cash
Covenant
•
External advice
•
Monitoring
•
Directness of covenant
Note: These are exploratory ideas only.
The final approach may not adopt any
of these ideas, and others may emerge
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Next Steps
•
Review of information submitted to us (work in progress). We may seek more
information on
– Contributions
– Levels of risk
– Investment risk mitigation (through swaps etc)
– Covenant
•
A proactive engagement from us in some cases whilst valuations are in progress
– Where we have previously indicated substantial concerns
– In cases that we have not closed because of ongoing concerns
– Less than 100 schemes and all in excess of £500m.
•
Updates to our triggers to reflect new priorities
•
A much more focused review process
– We will still look at all schemes post-submission
– But expect a smaller number of more assertive interventions
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Sum up – our overall expectation
•
Increasingly joined up funding/investment/covenant
•
Business plan, including clarity about strength of sponsor support, where it resides
and how accessible it will be if and when needed.
•
Parental support / wider group support increasingly formalised
•
Monitoring covenant and suitable actions that may be taken and in what
circumstances
•
Trustees to be flexible where covenant is weaker and tolerance needed, but with
corresponding shareholder restraint
•
There are many well managed schemes doing the right things. We are happy to
work with them to identify models of best practice.
•
We want to get ahead of issues for schemes where this is not the case, in part by
pro-active engagement
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission
Questions?
This presentation remains the property of The Pensions Regulator and should not be reproduced without express permission