U.K. regulator warns trustees against post-pandemic complacency

The Pensions Regulator wants U.K. trustees and employers to focus on long-term planning and risk management, even though funding levels have improved.

In its annual funding statement published Wednesday, the regulator said trustees should actively monitor and mitigate liquidity and diversification risks by stress testing portfolios against adverse market shifts, by examining derivatives exposure to margin or collateral calls, and by reviewing relevant assumptions, such as longevity.

The regulator called on pension funds with triennial valuations taking place between September 2020 and September 2021 to consider future improvements to longevity due to vaccines and medical advances developed during the pandemic.

"One way to capture the uncertainty from recent events may be to retain a mortality assumption similar to previous valuations and if evidence for different assumptions emerges, any savings from these can be recognized at future valuations," the regulator said.

The regulator also said in its statement that trustees are more frequently monitoring the employer's ability to cover liabilities, known as the covenant. But it reiterated that trustees should get advice from independent advisers in circumstances where the employer's recovery from the COVID-19 pandemic is unclear, the covenant is already deteriorating or the plan sponsor is affected by the U.K.'s withdrawal from the European Union.

Where COVID-19 continues to have a material impact on the employer, trustees should not expect a full recovery will come from employers' contributions, the regulator said.

At the same time, the regulator would not generally expect employer contributions to be reduced or recovery plan end dates to be extended unless there was a COVID-19 or Brexit-related impact, it said.

Trustees should carefully consider any requests from employers to accept lower contributions. "We expect any such request to be short term, with higher contributions in subsequent years limiting any extension to recovery plan end dates," the regulator said, adding it will view corporations' attempts to pay dividends as inconsistent with plans having to agree to lower contributions.

The regulator also outlined in the statement that where Brexit's impact on plan sponsors is material, trustees should examine the employer's ability to make deficit repair contributions.

Commenting on the statement, Paul Houghton, partner and head of actuarial consulting at consultant Barnett Waddingham, said in an email: "Trustees with valuations this year should now have a lot more clarity around the impact that both Brexit and the COVID pandemic have had on sponsoring employers. However, these issues will affect schemes in very different ways. While schemes with distressed sponsors continue to face challenging times, the significant improvements in funding positions since the start of the vaccination programs could represent an opportunity for many."

Other industry participants said that the regulator did provide useful direction to trustees on mortality assumptions. Lynda Whitney, partner at consultant Aon, said in an email that given COVID-19, it was a helpful for TPR to allow for 2020 to be removed from longevity projections. Ms. Whitney added that the regulator is focused on integrated risk management and planning and expects a wider range of risks to be considered.