Industry experts have broadly welcomed The Pensions Regulator's (TPR) defined benefit (DB) Annual Funding Statement, highlighting the clarifications around covenant and trustee's assessment of supportable risk as particularly helpful.

TPR's latest ASF, which is the first under the new DB Funding Code, revealed that the regulator expects most DB pension schemes to shift their focus from deficit recovery to endgame planning, after the majority of DB schemes are now in surplus.

The Society Pension Professionals (SPP) welcomed this focus on endgame planning, suggesting that given the healthy funding positions reported in this year’s AFS, it "makes sense" for TPR to place a greater emphasis on endgame planning.

"But TPR is also right to highlight global economic uncertainties and the risks they could pose," SPP DB Committee chair, Jon Forsyth, said.

"With this being the first AFS under the new funding regime, TPR has used the rest of the Statement to make some further clarifications to its expectations in a number of areas, including in relation to the long term objective, covenant assessment and monitoring, and the new “supportable risk” test.

"Overall the AFS doesn’t contain many surprises, but that will likely be good news for the first schemes working their way through the new valuation process.”

This was echoed by Association of Consulting Actuaries (ACA) chair, Stewart Hastie, who pointed out that much of the annual statement focuses on clarifying aspects of the ‘new’ funding regime, including clarifications surrounding the covenant guidance released late last year.

In particular, Employer Covenant Practitioners Association (ECPA) particularly welcomed these changes, as ECPA chair, Luke Hartley, welcomed the clarifications emphasising the importance of planning in determining the scope and proportionality of covenant assessment, and the continued importance of assessing and monitoring the employer covenant when submitting a valuation under fast track parameters, once a scheme is funded to low dependency and in considering its endgame strategy.

He stated: “The further clarifications to the assessment of cash flow, maximum affordable contributions, covenant reliability/longevity and the assessment of guarantees will also be of value to our members and clients alike, albeit – as acknowledged by the regulator - there will inevitably be situations in practice not covered by guidance where the application of professional judgement will be critical to reaching agreement.”

PwC pensions employer covenant partner, Katie Lightstone, pointed out that TPR has also clarified why Pension Protection Fund (PPF)-compliant guarantees, which were previously thought to be the gold standard, are not robust enough to support funding to low dependency.

However, she noted that the regulator stopped short of explaining what enhancements are needed for a PPF guarantee to qualify as ‘look-through,’ arguing that this "feels like a missed opportunity".

In addition to this, Lightstone pointed out that whilst further guidance has been provided on how trustees should consider 'supportable risk', TPR stopped short of publishing its own supportable risk formula, something many in the market had been "eagerly awaiting".

"Trustees currently working through valuations may need to revisit their approach which may now involve a higher risk measure," she added.

And broader more guidance may also be needed, as Hastie said that TPR is expected to have a major role in helping schemes navigate new surplus flexibilities anticipated in the forthcoming Pensions Bill.

"Let’s hope TPR can move a lot quicker than the Funding Code in releasing new guidance on surplus that brings the right balance between protecting members benefits and reckless prudence that holds back economic growth and better outcomes," he said.

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