Today’s publication of a long-awaited second consultation on a funding code for DB pension schemes sets out a more pragmatic approach from the Pensions Regulator (TPR) in key areas, compared to DWP’s (Department for Work and Pensions) regulatory proposals earlier in the year, according to leading pension consultants LCP. However, concerns remain in key areas.
Jon Forsyth, partner at LCP, said: “This long-awaited bumper set of documents is now helpfully putting some more workable detail on the future of DB (direct benefit) funding and investment regulation, but it also highlights that DWP’s regulations now need to catch up with TPR’s thinking.”
The DWP recenlty published proposed “rigid new rules” which, according to Forsyth, would have “forced all schemes into a straitjacket, required many sponsoring employers to put more money into their pension schemes, and could have resulted in dozens of sponsoring employers being forced out of business”.
He said TPR’s more pragmatic approach does not fit with the DWP’s draft regulations, suggesting that TPR and DWP need to work closely together over the coming months ”to ensure TPR’s more pragmatic approach is reflected in the final regulations”.
Emily Goodridge, managing director, Cardano Advisory, said: “It is really positive to see TPR looking at employer covenant over a scheme’s journey plan, taking into account concepts such as visibility, reliability and longevity of covenant. However, we have reservations about a relatively prescriptive “one-size-fits-all” approach to assessing supportable risk.”
Goodridge believes this could result in mixed messaging.
She said: ”On the one hand, covenant is seen as key to supporting scheme risks over a journey plan and on the other hand, the parameters to satisfy the “Fast Track” regulatory channel do not include any covenant metrics. Trustees should focus on the expectations set by the draft regulations and draft funding code, and not just on whether TPR will check up on them.
”Fast Track is essentially just a way for TPR to proportionately filter valuations on a risk basis. It is not a gold standard, and is absolutely not an excuse for becoming complacent about covenant, particularly given the challenges many employers are facing at present and their role as the ultimate underpin for a defined benefit pension scheme.”
John Dunn, head of pensions funding and transformation at PwC UK, welcomed the decision to keep the Fast Track approach. separate from the code. He said that this means ”all valuations will need to comply with the principles-based code and the relevant legislation”.
Dunn added: “Some trustees may then choose to submit a valuation that will meet the Fast Track parameters and can then expect to provide less information to demonstrate compliance.”
As for TPR’s proposed Fast Track framework, Dunn said: “This has been paired back to just one set of parameters regardless of the strength of the sponsor. Under Fast Track, trustees simply adopt a progressively lower risk funding and investment strategy as the proportion of members drawing a pension increases. Assuming the filters are set at the right level, Fast Track appears to offer many trustees and sponsors a streamlined approach to conducting a valuation.”
However he also has reservations. “One concern is that whilst TPR estimates that 70% of the 5,000+ corporate defined benefit schemes would have met the Fast Track valuation parameters in March 2021, this proportion is now only 50%.
”This isn’t because schemes are less well funded, but results from TPR’s actuarial yardstick to measure how mature a pension scheme is, its duration, being set before the unprecedented increases in interest rates this year. Rising rates have caused schemes’ durations to reduce considerably, which under the Fast Track proposals requires a more conservative funding and investment strategy.”
The Association of Consulting Actuaries (ACA) chair, Steven Taylor, also welcomed TPR’s new funding code, while urging some caution.
Taylor, said: ”The scale and ambition of today’s proposals are admirable, and we agree with the core principles laid out. However, a key test for the new Code will be how it enables the continued smooth transition of DB schemes to their endgames without disrupting well-planned scheme-specific approaches or introducing new hurdles or compliance costs.
“Within the detail of the Code itself, it will also be important to closely examine the read across to DWP’s regulations as, unusually, these are expected to continue to evolve in the New Year. The ACA would like to see less prescription in DWP’s final regulations, to ensure that TPR’s vision for scheme-specific bespoke funding is viable in practice.
“At a system wide level, the Code does not set out to drive significant behavioural changes around LDI. However, it will be important in due course to examine the impact of the new Code alongside any future regulatory steps in this area.
“We look forward to working closely with TPR and responding to the consultation to help ensure that the new funding code delivers for all stakeholders – providing strong reassurance to members and trustees, but also clarity to sponsors on the cost of their pensions promises.”
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