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.