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July 2018

The Pensions Regulator (TPR) has stepped up its review process for smaller schemes and announced a new strategy for engaging with trustees of smaller DB schemes in connection with their triennial actuarial valuation. Although ‘small’ has not been defined, it is understood that it refers to schemes with assets of less than £100m.

The approach

  1. TPR will select schemes where their analysis is outside their normal assumptions. As an example the 10 year trigger point has reappeared. Others might be the size of the liabilities to the employer, the investment strategy, etc.  Alternatively, a scheme may be selected because TPR already has some concerns over it.
  2. TPR will then write to Trustees at the start of the valuation process to confirm the Regulator’s initial view on covenant strength and to set out some specific issues they would like the Trustees to consider before the valuation process is finalised. (A number of smaller schemes have already been contacted in connection with their 2018 valuation (those having an effective date between 22 September 2017 and 21 September 2018).)
  3. A questionnaire accompanies TPR’s letter, which the trustees are required to complete and return along with the finalised valuation. We have however extracted the questions from this questionnaire which can be found below.
  4. TPR will then review the valuation and the trustees’ response, and then either accept or raise further questions.

In the first year, TPR intends to assess the strategy for around 50 schemes, with the possibility of the new strategy being rolled out more widely in future years. For schemes not selected in the current valuation cycle, TPR will carry out comprehensive risk assessments and engage where appropriate once the trustees have submitted their valuation.  Although not a requirement, those trustees are encouraged to complete the questionnaire on a voluntary basis, and submit it via TPR Exchange.

Our view

We feel that TPR has decided that their existing analysis does not collect the detail of the Trustees’ discussion process, which is clearly key information. While this new approach only applies to the schemes selected each year, there is no doubt that if successful, it may become the norm. In the meantime, it would be opportune to ensure that areas raised in the questionnaire (e.g. employer covenant, statement of investment principles and an integrated risk management framework) are reviewed and brought up to date.

TPR 2018 valuation questionnaire

1 Basic details
1.1 Full name of the pension scheme
1.2 Effective date of the actuarial valuation this questionnaire relates to
1.3 Date this questionnaire was completed
1.4 Details of the person(s) who completed and submitted this questionnaire on behalf of the trustees (name, title, email address, role in scheme and direct telephone number please) in case we have any queries.
2 General
Please note: We recognise there are a wide variety of trustee structures in place among schemes, and that the structure itself is not necessarily an indicator of the effectiveness or otherwise of a particular set of trustees. As such, the information requested here is to provide context to the valuation outcome and we will not be making any decisions or judgements in relation to a scheme solely on the basis of the answers supplied.
2.1 Please provide the names of the current trustee(s) of the scheme. If the scheme has a corporate trustee, please also provide the names of its directors.
2.2 Please identify which trustee(s) (or trustee-directors, if the scheme has a sole corporate trustee) were nominated and selected by scheme members. Please also identify any professional trustee appointed to the board.
2.3 Please identify any trustees or trustee-directors that also hold positions at the employer (as employee, board director, shareholder/owner etc), along with their corresponding title/position.
2.4 Did any of the trustees or trustee-directors identified in Q2.3 participate in a) the valuation discussions and b) valuation decisions in their trustee capacity? Yes/No
2.5 Which individual(s) (name and position) at the employer were responsible for the valuation discussions/negotiations with the trustee(s)?
3 Employer covenant
3.1 Have you completed an assessment of the strength of the employer covenant supporting the scheme as part of the valuation process? if ‘no’, explain why not.
3.2 If the answer to Q3.1 is ‘Yes’, did you receive advice from an independent covenant expert external to the trustee board? If so, please confirm the name of the person and firm that provided covenant advice to you. If ‘no’, explain how you assessed the strength of the employer covenant.
3.3 Is the employer part of a wider group of companies? If the answer is ‘Yes’, please provide the full name(s) of the UK parent company and, if different, the ultimate parent company in the group.
3.4 Please summarise the key outcomes of your assessment of employer covenant, including the overall covenant rating, conclusions on the affordability of pension contributions by the scheme’s employer(s) and if the answer to Q3.3 is ‘yes’, the degree to which the trustees explored whether any additional support for the scheme might be available from the wider employer group.
Covenant rating: As well as guidance on our website on the types of issues we expect trustees to consider when reviewing covenant strength, including potential questions and challenges that can be put to the employer, an explanation of our covenant bandings is included in the Defined Benefit Funding Regulatory and Enforcement Policy document.
4 Investments
Investment guidance: Please see our DB investment guidance for further information:
4.1 Does the scheme have a statement of investment principles (SIP)? Yes/No
  If ‘Yes’, confirm the date that the SIP was last reviewed. If ‘No’ explain the reason(s) why a SIP is not required and confirm if there is any other means by which the scheme’s investment strategy is documented?
4.2 When did the trustees last actively review the suitability of their investment strategy?
4.3 Please explain how the trustees identify and assess their key investment risks?
4.4 Please explain how the trustees considered factors such as the maturity of the scheme’s liabilities and the ability of the employer covenant to support the investment risks when determining the investment strategy?
4.5 If the trustees take investment advice, please confirm the name of your adviser (name of individual and firm).
5 Funding and risk management
5.1 Does the scheme have any secondary, or long term, funding target in addition to the technical provisions/statutory funding objective? If ‘Yes’, provide a brief outline.
5.2 Has an integrated risk management (IRM) framework been put in place for the scheme which has been documented in writing? If ‘No’, what consideration has been given re IRM?
Integrated risk management (IRM): Please see our integrated risk management guidance for further information.
5.3 How often do the trustees review the scheme’s funding position?
5.4 Does the scheme have any formal contingency arrangements in place that would automatically trigger specific actions (e.g. payment of additional contributions) following a particular event occurring or a threshold being reached? If ‘Yes’, provide a brief outline.
6 Trustees’ response to our letter about the current valuation
6.1 If you have received this questionnaire alongside a letter from us, please explain how you have addressed each of the matters we highlighted in our letter for your consideration.