The UK pensions industry is calling for the implementation date of the Defined Benefit (DB) Funding Code to be put back as there is still confusion over how trustees are required to comply because regulations do not seem to align with the Code.
The Pensions and Lifetime Savings Association (PLSA) and consultancy XPS Pensions Group have stated this morning in their responses to The Pensions Regulator’s (TPR) consultation on the matter – which closes today – that the set date of 1 October 2023 should be pushed back to 2024.
The PLSA’s submission welcomes the additional flexibility in the draft code, particularly around the investment strategies that schemes can adopt and concepts of reasonable affordability. “There is much in the new funding regime that will help protect scheme members,” the association said.
“However, there are serious concerns that there is a disconnect between TPR’s guidance and the related regulations,” it added.
As a result, amendments to the legislation will be necessary in advance of implementation and an implementation date of 1 April 2024 is more realistic, the PLSA stated.
“This extension will give schemes and employers the appropriate time to prepare, especially as the covenant guidance is not expected to be released until after the consultation on the code has concluded,” it added.
Heidi Webster, head of scheme funding at XPS Pensions Group, agrees that more time needs to be given for the industry to be fully consulted and prepared.
“Given the long-term nature of the new funding regime, we feel TPR (and DWP [Department for Work & Pensions]) should take appropriate time to ensure the industry is fully consulted. Even if this means delaying implementation to later in 2023 or early 2024,” she said.
On the whole the changes set out in the code will help to embed a best practice approach for more schemes, improving collaboration between trustees and employers and ultimately leading to improved member outcomes, Webster noted.
“However we have some concerns about the code as drafted, including that having to define the new covenant timeframes (visibility, reliability and longevity) may result in unproductive disagreement between trustees and employers; covenant reliability being a key driver of risk taking on the journey and recovery plan length,” she added.
“We also feel that further guidance is required where schemes are close to or already beyond their deadline for reaching low dependency. For these schemes we feel realistic and reasonable measures should be available to bridge any remaining funding gap and to transition assets to a low risk allocation,” Webster concluded.
In limbo
Consultancy LCP also noted that the proposed implementation date for the new regime of 1 October 2023 looks increasingly impractical and leaves schemes in ‘limbo’ as they await details of the new rules.
Back in July 2022, DWP published a consultation on the detailed regulations which would govern DB funding, arising from the 2021 Pension Schemes Act. Respondents had 12 weeks to send in their comments, with the consultation closing on 17 October 2022. But over five months later the government is yet to say how it will respond.
Since the regulations were published, there have been two new pensions ministers and these changes in key personnel are likely to have contributed to the delay in responding, LCP added.
Critics of the proposed regulations argued that the new legal framework would be overly rigid, giving insufficient flexibility to reflect the specific circumstances of individual schemes, and could force schemes to de-risk unnecessarily rapidly, said Jon Forsyth, partner at LCP.
“The industry cannot go on waiting indefinitely. These new rules could have big implications for schemes and the firms who stand behind them, and they need decent notice of what the new rules will be and when they will be implemented. TPR is also in a difficult position having to wait on DWP until it can finalise its own funding code, so it is vital that DWP unlocks this legislative limbo,” he said.
Not ‘one fits all’
There is also a major concern over the definition of ‘maturity’ in the Code. The PLSA said it was important to note that not all schemes are at the same stage of maturity, and not all employer covenants are the same.
DB pension schemes should be given greater flexibility over how to define scheme maturity, the PLSA stated, over the right regulation of “duration”, and on the requirements on schemes as they approach low dependency.
According to the association, 60% of trustees agree that greater flexibility will allow open schemes to take a different approach.
Nigel Peaple, director of policy and advocacy at the PLSA, said: “It is important that the new regime fully recognises that not all DB schemes are the same, some are open, some are closed, and all are at varying levels of maturity. Equally, not all employer covenants are the same and it is important that the final regime reflects this and provides appropriate flexibility.”
According to consultancy Cardano, rises in Gilt yields over 2022 have effectively shortened scheme journey plan timeframes by around seven years, which is a material change and demonstrates the significant shortcoming of using a static duration figure as the definition of ‘Significant Maturity’, with 12 years duration no longer providing sufficient time to reach low dependency for many schemes.
“If a change is not made, many schemes may be forced into non-compliance or they may have to fundamentally change their approach with corresponding consequences on the sponsor and/or to their risk profile, which is not the intent of the Code as we understand it,” Cardano said in its response to the consultation.
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