PPPslides.pdf David Fairs slides for the Pension PlayPen

David Fairs' slides for the Pension PlayPen

1. 1
20
th
August 2024
Presentation to Pensions Playpen
David Fairs, Partner LCP and former
Executive Director at TPR
[email protected]
07546699183
•Options for a Funding Regime
•The Funding Eco System
•The Journey to the New Funding Code
•The Funding Code in Summary
TPR’s new Funding Code

2. 2
Options for a Funding Regime?
Unfunded promise -German Book Reserve System
•No assets
•Full insolvency Insurance
Solvency II type Funding
•Funded to buy out
•No insolvency Insurance
Fund on Best Estimate Basis
•Insolvency Insurance
Fund on a conservative Basis
•Employer Covenant
•PPF Underpin
Balancing funding efficiency vs Security on sponsor insolvency?

3. The Funding Eco System
Pension Fund
Bank of England
Pension Protection Fund
Members
Sponsors
Treasury
DWP
TPR
Work and Pensions Select
Committee•Tax incentives
•Impact on UK
PLC
•Gilt Issuance
•Members get
their entitlement
•Sponsors behave
•Benefit or
financial
obligation?
•Hold
Government
to account
•Hold TPR to
account
•Is system
effective
•Economy
•Financial
markets
•Financial
Stability
•Gilt Issuance
•Meet Claims
•Become fully
funded by 2030
•Remain solvent
•Raise levy
“equitably”

4. 4
22 Sep 2024
TPR Consultation 2:
Funding Code and
Fast Track
New
regime in
force
Jul
2022
Mar
2023
Final
Code
Dec
2022
DWP
consultation on
Regulations
Oct
2022
6 Apr 2024
Final
regulations
effective
date
Jan 2024
Final draft
regulations
Mar 2020
TPR first
consultation
on new regime We are here
July 2024March 2018
DWP white
paper
A long time coming…
The road to implementation
DWP White Paper:
•System mostly works
•Most schemes are now closed to new entrants and future accrual
•Some sponsors abuse the flexibility in the system

5. 5
A helpful evolution since the Second Consultation?
FundingCode
More flexibility More clarity More principles-based
Focus on Integrated Risk Management

6. 6
In all cases schemes must meet these new legal requirements
Legal requirements of the new regime
Reminder of the headlines
1
Trustees and employers to agree a
“funding and investment strategy”
2
All schemes must be fully funded on a
low-risk basis from “significant maturity”
3
Deficits must be recovered as soon as
the employer can reasonably afford

7. 7
A time to take stock
Funding and Investment Strategy
1
Buy-out
2
Running on
3
Transfer to superfund / consolidator
4
Remain open!

8. 8
0%
10%
20%
30%
40%
50%
60%
70%
2024202520262027202820292030203120322033203420352036203720382039
Proportion of schemes
Proportion of schemes at significant maturity
Source: LCP Visualise, with each scheme’s duration calculated each year as at 30 June, based on 31 March 2023 financial
conditions. Results are provisional, based on an initial cut of data; and generally excludes schemes that are fully insured.
Based on analysis of LCP’s clients
When do schemes need to target
low dependency?
of our clients
reach significant
maturity in the
next 6 years
10%
Understand when your scheme will reach Sig Mat

9. 9
0%
10%
20%
30%
40%
50%
60%
70%
2024202520262027202820292030203120322033203420352036203720382039
Proportion of schemes
Proportion of schemes at significant maturity
Source: LCP Visualise, with each scheme’s duration calculated each year as at 30 June, based on 31 March 2023 financial
conditions. Results are provisional, based on an initial cut of data; and generally excludes schemes that are fully insured.
Based on analysis of LCP’s clients
When do schemes need to target
low dependency?
of our clients
reach significant
maturity in the
next 6 years
10%
Understand when your scheme will reach Sig Mat
of our clients
still to reach
significant
maturity after
15 years
40%

10. 10
Today
Significant
maturity
Low covenant
dependence:
•Fully funded
•Low investment risk
Time
Investment and covenant inputs
Setting the journey plan

11. 11
Today
Significant
maturity
Higher covenant
dependence:
•Higher investment risk
Low covenant
dependence:
•Fully funded
•Low investment risk
Time
Investment and covenant inputs
Setting the journey plan

12. 12
Today
Significant
maturity
Higher covenant
dependence:
•Higher investment risk
Low covenant
dependence:
•Fully funded
•Low investment risk
Covenant reliability period:
driving max investment risk
Time
Investment and covenant inputs
Setting the journey plan

13. 13
Today
Significant
maturity
Higher covenant
dependence:
•Higher investment risk
Low covenant
dependence:
•Fully funded
•Low investment risk
Covenant reliability period:
driving max investment risk
Time
Technical provisions consistent with journey plan
Investment and covenant inputs
Setting the journey plan

14. 14
Today
Significant
maturity
Higher covenant
dependence:
•Higher investment risk
•Deficit funding
Low covenant
dependence:
•Fully funded
•Low investment risk
Covenant reliability period:
driving max investment risk and recovery plan length
Time
Investment and covenant inputs
Setting the journey plan
Technical provisions consistent with journey plan

15. 15
Why covenant still matters
Covenant reliability period:
driving max investment risk and recovery plan length
Higher covenant
dependence:
•Higher investment risk
•Deficit funding
Today
Significant
maturity
Buyout
funding
Low covenant
dependence:
•Fully funded
•Low investment risk
No covenant
dependence?
Covenant longevity period
Time
Beyond longevity period

16. 16
2/3rds
of schemes have a
surplus on a
Gilts + 0.5% pa
basis
Schemes in surplus have more
investment flexibility
Surplus assets don’t need to be
invested in line with the LDIA
Surplus assets reduce the risk of
employer contributions being needed

17. 17
Supportable level of risk
(ieDemonstrate the covenant can support
the scheme to achieve full funding on
Technical Provisions, by the end of the
covenant reliability period, even if there is a
1-in-6 downside event)
Sufficient liquidity
in normal and stressed market conditions
Immediate requirements:
On your journey to the LDIA
Set an investment journey plan,
which describes how the scheme will
transition to the LDIA
Complying with the detail of the new Code

18. 18
LDIA requirements:
For the period after significant maturity
Highly resilient
(ieExpect the funding position to recover
from a one year 1-in-6 downside event
within 6 years, with no further support from
the employer)
Supportable level of risk
(ieDemonstrate the covenant can support
the scheme to achieve full funding on
Technical Provisions, by the end of the
covenant reliability period, even if there is a
1-in-6 downside event)
Sufficient liquidity
in normal and stressed market conditions
Sufficient liquidity
in normal and stressed market conditions
Immediate requirements:
On your journey to the LDIA
At least 90% liability hedging
(noting it is important to consider the shape
of the yield curve)
Set an investment journey plan,
which describes how the scheme will
transition to the LDIA
Complying with the detail of the new Code

19. 19
Fast Track:
prescribed
parameters, simpler
path to compliance
Don’t meet all
Fast Track
parameters?
Bespoke:
more tailored to
each scheme
But in all cases schemes must meet the new legal requirements
Twin-track regime
Regulatory approach

20. 20
0%
50%
100%
150%
200%
250%
8 10 12 14 16 18 20 22 24 26
Estimated duration on FT low dependency
Current TPs as a proportion of minimum Fast Track technical provisions
Source: LCP Visualise, as at 30 June 2024. Results are provisional illustrative calculations, based on an initial cut of data, and generally
excludes schemes that are fully insured.
~85%
of our clients meet the
Fast Track technical
provisions test
Fast track TPs versus existing TPs at 30 June 2024
Possible impact on LCP schemes

21. 21
0%
50%
100%
150%
200%
250%
8 101214161820222426
Current TPs as a proportion of minimum Fast Track
low dependency liabilities
Estimated duration on FT low dependency
Current TPs as a proportion of minimum Fast Track technical provisions
Source: LCP Visualise, as at 30 June 2024. Results are provisional illustrative calculations, based on an initial cut of data, and generally
excludes schemes that are fully insured.
~85%
of our clients meet the
Fast Track technical
provisions test
~80%
of our clients meet the
Fast Track recovery plan
test
Fast track tests at 30 June 2024
Possible impact on LCP schemes

22. 22
Source: LCP Visualise, using actual asset allocations as at 30 June 2024. Results are provisional, based on an initial cut of data.
~90%
of our clients are
expected to pass this test
Fast Track funding &
investment stress test
BF0

23. Slide 22
BF0 From calculations tab:
https://lcponline.sharepoint.com/:x:/r/teams/Newfundingcodegroup/Shared%20Documents/General/2024%2008%20Webinar/Analysis%20of%20clients.xlsx?d=wb3f6169814cd474399bf081dd935c013&csf=1&web=1&e=utMjba
Ben Firth (LCP), 2024-08-05T17:05:24.477

24. 23
•What information and when?
•Bespoke submissions vs Fast Track Submissions
•Fast Track spot checks?
•Bespoke submission reviews
•Use of machine reading?
•Selection of cases for action
TPR involvement

25. 24
High level principles of:
•Long-Term Objective (LTO)
•Low Dependency
Investment Allocation
(LDIA)
•Low Dependency Funding
Basis (LDFB)
•Training
•Consider long-term
strategy
•Initial covenant analysis
Prep / Pre valuation
Six months
before
valuation
date
Trustee / sponsor
discussions
VALUATION
DATE
•Updated covenant
analysis, including
reliability
Analysis
•Stress tests
•Assumptions advice
•Initial results
(including significant
maturity, TPs, LDFB,
Rec Plan etc)
•Proposal to sponsor
Actuarial advice
•Agree Relevant Date /
LTO / LDIA / LDFB
•Agree TPs, Recovery
Plan, contingency plans
•Agree route to TPR
compliance –Fast Track
or Bespoke
Trustee / sponsor to agree
valuation
(iterations may be
required)
15 months
after
valuation
date
Statutory
deadline for
valuation
Submit
valuation to
TPR
•Risk monitoring and
management
Ongoing
•Statement of strategy
•Statement of funding
principles
•Schedule of
contributions
•Recovery plan
•Fast Track sign off
Formal documents
New valuation timeline

26. 25
Lane Clark & Peacock LLP is a limited liability partnership registered in England and Wales with registered number OC301436. LCPis a registered trademark in the UK and in the EU. All partners are members of Lane Clark
& Peacock LLP. A list of members’ names is available for inspection at 95 Wigmore Street, London W1U 1DQ, the firm’s principal place of business and registered office. Lane Clark & Peacock LLP is authorised and
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© Lane Clark & Peacock LLP 2024
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Contact
This generic presentation should not be relied upon for detailed advice or taken as an authoritative statement of the law. Ifyou would like any assistance or further information,
please contact the partner who normally advises you. While this document does not represent our advice, nevertheless it should not be passed to any third party without our formal
written agreement.
David Fairs
Partner & former TPR Executive
Director
020 7432 6681
[email protected]