Responding to the Pensions Regulator’s Statement of Strategy consultation, which closed on Tuesday 16^th April, we set out our summary key points here.

Key points:

1. The latest Funding Code of Practice, Fast Track / Bespoke frameworks and associated guidance will be key information. The Statement of Strategy, Funding Code of Practice and Fast Track / Bespoke frameworks are inherently linked. The fact that trustees will be legally required to complete the Statement of Strategy in the format prescribed by TPR brings into sharp focus the need to examine the specific items being requested. It is crucial to ensure that every piece of information is necessary and appropriate. Trustees will need clear guidance and ongoing messaging to help them balance prudence and pragmatism.
2. The Statement of Strategy is primarily a tool to provide TPR with information to help it regulate DB schemes – it should not be seen as a replacement for “best practice”. In some areas, the Statement of Strategy asks for more than trustees might otherwise consider (while still meeting best practice), which could lead to additional administrative and cost burden on trustees and / or potential unnecessary tension between trustees and sponsors. In other areas, the information required falls short of best practice and we have concerns that trustees may believe they are adequately assessing covenant when all they are doing is providing TPR with data.
3. We believe that covenant should have primacy within the DB pensions risk management framework and are therefore pleased to see the role of covenant being referenced as the key driver to investment and funding risk decision-making. Currently, however, it is not clear where or how Trustees should document how covenant has influenced their funding and investment strategies.
4. A numerical or formulaic regulatory filter may introduce risks. We understand that some of the information that is being requested will be fed into a formulaic regulatory filter to drive engagement with certain schemes running excessive risk in TPR’s eyes. If this formulaic approach is public knowledge, then it will be possible to “game” it – i.e. providing information that is less likely to result in regulatory engagement. Unnecessary risk may be run as a result, and this risk may not be spotted.
5. Covenant is de-emphasised in Fast Track. Whilst we do not think TPR should ask for information it will not use, we are concerned that Fast Track will become synonymous with “no need to consider covenant”. This exacerbates a couple of risks:
   • Fast Track may not be the right funding and investment strategy for a scheme from a covenant perspective, and;
   • Trustees / TPR may miss impending distress / detrimental transactions if covenant is not adequately considered for Fast Track schemes.
6. More information is needed on the new covenant concepts of “reliability” and “longevity”. We remain of the view that a putting a timeframe on covenant reliability or longevity is likely to be arbitrary in many cases (covenant rarely has a cliff-edge, instead just becoming increasingly uncertain with time). A pragmatic approach may be to back-solve to the necessary time frames but this may also lead to gaming of the system or opinion shopping to pass the regulatory filter.
7. The maximum affordable contributions calculation lacks context. More detail should be provided on this assessment to avoid it becoming a purely box-ticking exercise focused on a central scenario carried out by trustees for regulatory purposes. This should include thoughtful consideration of risk tolerance based on future trading prospects and associated risks.
8. It would be helpful to reference where/how to integrate ESG risks into Statement of Strategy, particularly alongside other risk management frameworks. ESG risks can have an impact on covenant, funding and investment. Either within the Statement of Strategy guidance, the example Statement of Strategy or the data to be submitted, it would be helpful to see some explicit mention of the interaction with TCFD and TNFD frameworks as part of reporting on climate change and nature risks in an integrated way going forward.

To read our full consultation response, please click here.

• Defined Benefit (DB)
• Pension Schemes