The Pensions Regulator (TPR) has published a consultation on a revised code of practice for defined benefit (DB) scheme funding.
The results of the consultation will enable TPR to set a benchmark for good standards of compliance, expected to come into force at the end of 2021. These will be implemented in line with the introduction of the Pension Schemes Bill laid before Parliament in January.
Under TPR’s proposals, schemes will be able to choose a ‘fast track’ or ‘bespoke’ approach to submitting a valuation. If a trustee is able to demonstrate that a scheme’s funding and investment meets TPR’s guidelines for a compliant scheme, it will be able to follow the fast track approach, which will be subject to little regulatory interaction.
The bespoke track, which will be subject to greater regulatory scrutiny, will provide flexibility for schemes that have taken a different approach to scheme funding.
The consultation also proposes that all schemes must set a long-term objective, which should represent a low dependency basis for funding. In addition, TPR will routinely consider asset allocation and set limits around the level of investment risk schemes should take at different maturities to qualify for the fast track.
David Fairs, executive director of regulatory policy at TPR, said: “We want to make sure pensions have the necessary long-term approach to ensure savers get the benefits they expect. Today, we are setting out our expectations about how trustees should manage risks in an integrated way when planning their scheme’s long-term funding and investment strategies.
“With most DB schemes closed to new members and/or future accruals, we can expect them to be significantly mature in 15-to-20 years’ time, with the majority of their members retired. These schemes will be more vulnerable to risks associated with poor funding levels and shorter investment horizons. Therefore, trustees should aim to reduce their scheme’s reliance on the sponsoring employer as they mature.
“We want to be confident our expectations are effective and appropriate for trustees and, in turn, the savers in these schemes.”
Marian Elliott, managing director at Redington, added: “The consultation sets out a well-thought-through and welcome approach from TPR, and the new code should rightly focus trustees’ and sponsors minds on planning for the longer term, rather than focusing on getting each valuation over the line.
“It is also likely to reduce running costs for those schemes where a fast track approach is feasible. This will be particularly welcome for smaller schemes where the cost of professional advice is a high proportion of scheme assets.
“That said, the devil will be in the detail. For example, the approach to covenant strength and maturity could cause some unintended consequences. The way in which open schemes are treated may also result in some difficult interactions, particularly for multi-employer and industry wide schemes where a change in funding approach might be difficult with a wide group of participants and stakeholders.
“While overall a positive direction of travel, we would encourage all schemes to respond to the consultation and put forward their own specific circumstances and how these might be affected by the principles outlined in this consultation.
“The greater engagement that TPR receives in response to the consultation, the more likely that the eventual code will be workable for the majority of DB schemes and that unintended or unforeseen adverse consequences for schemes in particularly unique positions can be avoided”.
The consultation will be open to responses until 2 June 2020.