Integrated funding framework October 2014 kpmg.com INTEGRATED FUNDING FRAMEWORK COVENANT, INVESTMENT AND FUNDING – WORKING TOGETHER STEP 1 / WHAT IS MY COVENANT WORTH? EVOLUTION OF DEFICIT £600M £600M £500M £500M £400M £400M £300M £300M £200M Sep 2012 Jan 2013 May 2013 Sep 2013 Jan 2014 May 2014 Sep 2014 £0 £100M £100M £200M £200M £300M £300M Assets Expected deficit Deficit te g y s t ra ng gy May 2012 F un STEP 3 / WHAT DOES THAT MEAN FOR SCHEME FUNDING AND THE VALUATION? STEP 4 / PULL TOGETHER INTO YOUR INTEGRATED FUNDING FRAMEWORK AFFORDABILITY MATRIX REPAYMENT PERIOD (AT NEXT VALUATION) The Integrated Funding Framework in practice – an example The scheme had funding liabilities of around £500m with assets of around £400m resulting in a deficit of £100m. Looking forward three years, on consistent assumptions and allowing for cash contributions, the deficit is expectedto reduce to £70m. Could the sponsor afford the downside? Should the Trustee choose to take these risks? THE NEW FUNDING CODE TPs DEFICIT IN 3 YEARS TIME t di ts te Jan 2012 Liabilities en ra Sep 2011 £0 Your Integrated Funding Plan I nve s t m STEP 2 / HOW MUCH INVESTMENT RISK WILL MY COVENANT SUPPORT? £200M May 2011 nt assessm ena en v t Co 5 10 15 20 -20 4 2 2 1 -70 15 8 6 5 -120 26 15 11 9 -170 37 21 15 12 -220 48 27 19 16 -245 54 30 22 18 -270 59 33 24 19 IMPACT GENERAL THEMES WILL THE CODE CHANGE BEHAVIOUR? ...to minimise any adverse impact on the sustainable growth of an employer This gives Trustees more flexibility in setting recovery plans. The focus is on minimising adverse impact on the employer and its long term growth plans. • Develop ‘appropriate’ funding arrangements • May affect negotiating positions – e.g. weaker statements on recovery plans • Understand, manage and monitor the risks you are taking • Proportionality An employer should not be expected to pay deficit repair contributions at a particular level simply because it would be able to afford to contribute at that level or because it has been paying them at that level. EXPECTED SCENARIO Base Level Stretch Level Unaffordable TRUSTEE PERSPECTIVE NEW CODE Recovery plans should be appropriate Gilt yields fell by around 0.35% during August 2014, increasing liability measures by up to approx.10% for many schemes • Balance • Consider the effect on the sponsor • Collaborative approach to funding • Employers may feel more empowered • May harden employer views on derisking • Less concern about tPR intervening? • Wide range of views on what is ‘appropriate’ • No change to the funding legislation or trustees’ fiduciary responsibilities • The Regulator’s new objective is for the Regulator and not for trustees • Desire to reduce risk driven by many factors, not just the Regulator • Trustees will generally develop funding and journey plans that they believe are appropriate, rather than to satisfy the Regulator For more information please contact: Stewart Hastie Iain McLellan London Scotland T: +44 (0)20 7311 2437 E: stewart.hastie@kpmg.com T: + 44 (0)141 300 5700 E: iain.mclellan@kpmg.com Jon Sharp Sophie Ash Leeds Birmingham T: +44 (0)113 231 3606 E: jonathan.sharp2@kpmg.com T: + 44 (0)121 609 6006 E: sophie.ash@kpmg.com Andrew Goddard Rob Bass Manchester South T: +44 161 246 4992 E: andrew.goddard@kpmg.com T: + 44 (0)118 373 1353 E: robert.bass@kpmg.com www.kpmg.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG LLP, a UK limited liability partnership and a member fi rm of the KPMG network of independent member firms affi liated with KPMG International Cooperative, a Swiss entity. All rights reserved. Printed in the United Kingdom. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. Create Graphics | CRT025824 | September 2014 | Printed on recycled material.