TPR Annual Funding Statement 2018

In its 2018 Annual Funding Statement for defined benefit schemes, TPR lays out its expectations of trustees during the valuation process. Of note is its focus on the fair treatment of schemes in the context of the various forms of covenant leakage. The most prominent example of this is dividend payments, which have been under scrutiny by TPR for a while, with the growth of dividend payments by companies outstripping their recovery plan contributions. In this statement, TPR also highlights directors’ remuneration and intra group loans as another form of cashflow from the employer covenant of which trustees should be aware.

Our view

In this statement, TPR stresses the importance of the equitable treatment of pension schemes, expecting that deficit recovery payments are not too low compared to the level of distributions from the employer, emphasising in such cases they would consider affordability to not be an issue. However, whether the scheme is being treated equitably can prove a complex judgement, with TPR not specifying ratios which they would consider to be excessive.

The level of directors’ remuneration compared to recovery payments is likely to prove a particularly contentious issue in negotiations between trustees and employers, but it remains important for trustees to maintain a good relationship with employers and for the two to work together constructively in agreeing recovery plans.

This statement, particularly in regard of the equitable treatment of schemes, shows the importance of subjective judgements made by trustees through the valuation process and the agreement of recovery plans. As such, independent covenant advice can prove an invaluable tool to help guide the decisions of trustees throughout the process.