Date:

Defined benefit and hybrid scheme returns

The Pensions Regulator (TPR) has announced that additional information will be required in relation to scheme returns for defined benefit (DB) and hybrid schemes. This includes:

  • Information on the financial assumptions used to calculate the technical provisions for schemes in surplus
  • Value at risk (VaR) calculations
  • Key details relating to any asset-backed contribution arrangements that are in place in relation to the scheme, including details of the underlying assets.

Financial assumption information for schemes in surplus

TPR has stated that the additional information it is seeking is consistent with that required under a recovery plan submission for a scheme in deficit. This will be used to help them better understand the risk landscape of schemes and to have consistent information for all schemes, regardless of their funding position.

The information relating to the technical provisions that you will need to provide is as follows: 

  • Discount rates
  • Discount rate structure
  • Pay increase assumptions
  • Inflation assumptions i.e .CPI/RPI.

This should all be available from the scheme’s most recent actuarial valuation and/or statement of funding principles.

Value at Risk (VaR) information

TPR has stated that the required information is to enable it to better understand the risk characteristics of DB pensions and refine its risk assessments of DB schemes. A VaR calculation is a method of assessing the impact and likelihood of potential risks arising over a period of time, which generally consists of an estimate of the additional deficit which could arise.  

The information relating to VaR that you will need to provide is as follows: 

  • Calculation in £ of the VaR at the most recent valuation date
  • Calculation date for the VaR
  • Liability basis for the VaR calculation
  • Percentile (%) at which the VaR has been calculated
  • Period over which the VaR has been modelled in years.

This should be available from actuarial valuations, actuarial reports, investment advice and investment monitoring reports.

Asset Backed Contribution Structures (ABCs)

TPR has stated that when considering the valuation and the scheme’s funding plans, it will consider the aggregate funding stream provided under any recovery plan and the ABC, rather than the net present value attributed to the scheme’s interest in the ABC.

The information relating to any ABCs in place that you will need to provide is as follows:

  • Value of the scheme’s interest in the ABC at the most recent valuation date or, if later, implementation
  • How the scheme’s interest in the ABC has been funded
  • Type of assets underpinning/forming part of the ABC structure
  • Whether or not existing guarantees or contingent assets have been surrendered by the trustee entering into the ABC arrangement
  • Whether the assets or cash flows to the ABC come from within the employer group or not
  • Annual payment information, either as a fixed or variable amount
  • Valuation of asset(s) underpinning the ABC including date, basis of valuation and whether the valuation was undertaken by a professional valuer.

This information can generally be found in the scheme’s annual report and accounts, within advice obtained as part of the most recent valuation or within advice obtained when the ABC was being agreed and implemented.

For more information on defined benefit or hybrid scheme returns, please contact a member of our specialist pensions team below.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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Colin Greig

Partner

I am a Partner specialising in pensions law.