The Pensions Regulator (TPR) has confirmed the new funding code has been laid in parliament today.
The Regulator said that following extensive industry consultation, the new defined benefit (DB) funding code complements the change in regulations and sets out a framework protecting savers while giving flexibility to the market.
It sets out to trustees, sponsoring employers and advisers TPR’s guidance and expectations on how to comply with the Funding and Investment Strategy requirements.
Once in force, it will replace the existing DB funding code that was introduced in 2014.
TPR said the new funding code encourages good long-term planning and risk management behaviours and includes guidance on how trustees can set funding plans in line with the support their sponsors can provide and how maturing schemes can move to a point of low dependency on their sponsor.
It also gives guidance on setting recovery plans in line with what is reasonably affordable for their sponsor.
The DB regulations, which align with the DB funding code, came into force in April this year and apply to valuations with effective dates on or after 22 September 2024.
After the UK election was announced for 4 July 2024, industry experts were concerned that there could be another delay to the fundingcode – it was initially expected to be laid in parliament in June to give the necessary 40 days for the code to come into force on 22 September.
Experts said at the time that pension schemes with valuations dated 22 September would be mostly affected as they would have to start their valuations without having sight of the final parliamentary approved funding code.
TPR recognises there will be a gap between when the requirements of the Funding and Investment Strategy Regulations start and when the new DB funding code is in force.
It said that schemes with valuation dates in this period can use the new DB funding code as the base for their approach; the regulator will communicate with affected schemes and will take a reasonable regulatory approach to them.
Neil Bull, executive director of market oversight at TPR, said: “Today marks the final step in realising a new DB funding code that reflects the changing DB landscape.”
He said that the DB funding code strikes the right balance between security and flexibility for scheme-specific funding and investment approaches in the interest of members and employers.
Bull added that the new code will enhance the system as well as provide a framework to protect millions of savers.
“It is a significant step, and we would like to thank all those who have contributed their views during our extensive consultation. Together we have developed a DB funding code that will support trustees in effectively planning and managing the long-term funding of their scheme today, and in the future,” he said.
He added that trustees, their advisers and sponsoring employers should read the new DB Funding Code to appraise themselves of what TPR sees as good practice.
David Hamilton, chief actuary at Broadstone, said: “It’s a great relief that we finally have sight of the final version of the Funding Code – some thought this day would never come.
“Trustees and their advisers, particularly those with 30 September or 31 December valuation dates, can now start to plan with greater certainty for the additional work that is needed.”
He stressed that there is “a lot of detail” to process and “some important” supplementary guidance still to follow such as that relating to employer covenant assessment.
He said: “We hope that our feedback regarding the burden on smaller schemes is reflected not just in the code itself – which regularly mentions a proportionate approach – but in the way in which the new regime is monitored and enforced.”
Iain McLellan, director at Isio, said the publication of the code “feels like getting to the end of the regulatory tunnel”.
“We are encouraged to see that the regulator (and the government in drawing up final regulations) has been willing to listen to industry concerns and smooth some of the new regime’s harder edges,” he noted.
McLellan said that a shift away from fixed rules and back towards a principles-based approach should allow trustees and scheme sponsors the flexibility to properly reflect their scheme’s particular circumstances in their funding and investment plans. In particular, he welcomed a more pragmatic stance on investment strategy, employer covenant and open schemes.
However, he echoed Broadstone’s Hamilton in saying that the industry is still awaiting updated employer covenant guidance and the final format of the statement of strategy, adding that trustees would need this document during their valuation processes.
Mark Tinsley, principal and senior consulting actuary at Barnett Waddingham, believes that most schemes are already well placed to comply with the requirements of the new funding regime.
The regulatory certainty provided by the publication of the new code means that now is an opportune time for schemes to review their funding strategies and long-term objectives, he explained.
He said: “Reassessing the full range of options is particularly important for the large number of schemes who are already, or will soon be, fully funded on a buyout basis – deciding who benefits from the existence of a surplus is the most crucial decision trustees and sponsors will ever make.”
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