TPR Annual Funding Statement 2019

TPR has recently issued its annual funding statement which provides specific guidance to schemes with valuations during the period 22 September 2018 – 21 September 2019.

The 2019 statement builds on key themes set out in recent guidance and prior year funding statements, with particular emphasis on the following areas.

Equitable treatment
In light of recent high-profile corporate failures, TPR scrutiny of the equitable treatment of defined benefit obligations and the requirements of other stakeholders (e.g. comparing DRCs to shareholder dividends) is again emphasised.

Length of recovery plans
TPR expects early engagement on a more frequent basis with schemes where the recovery plan period is considered to be too long.

Consultation
Finally, TPR notes that a consultation process will begin later in 2019 around an update to the defined benefit funding code. We think it is likely that the updated code will be regulated on a "comply or explain" basis.

Our view

Crucially, the funding statement provides greater clarity around TPR’s expectations of schemes – ten separate scenarios are set out to guide trustees and sponsors. Trustees should understand which of the scenarios are applicable to their scheme and, to do this, an understanding of the covenant position is vital. The weaker the Employer the greater the expectation that an independent covenant review will be undertaken.

Whilst the average recovery plan period is mentioned in the funding statement, we consider that – even under a potential “comply or explain” regime – this is unlikely to mean a return to the days when any recovery plan below a certain number of years would be automatically ‘safe’ from TPR’s gaze.

TPR notes that it will consider the wider context of the scheme in question (i.e. the maturity of the scheme and the strength of the covenant) in considering what an acceptable period might be. . Indeed, it is beginning to look as if maximum recovery plan lengths related to specified covenant ratings may be in the offing. Trustees may require independent advice in interpreting TPR’s likely view of their scheme.

There is also more emphasis on the requirement for trustees to document the thinking underlying their approach to scheme funding and, should independent covenant advice not have been taken, the justification for this should be evidenced.