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The Pensions Regulator has given a glimpse of what will be in its first of two consultations on a new DB funding framework, proposing a twin track approach for schemes to comply. TPR also wants to encourage greater use of contingent assets as it seeks to reassure employers over cash flow concerns.
The regulator’s executive director of regulatory policy, analysis and advice, David Fairs, has outlined the proposals TPR will consult on, including a ‘fast track’ option and a ‘bespoke’ category for more complex schemes. In a ‘DB statement’, trustees will need to articulate their approach and decisions on funding and investments.
Who can take the ‘fast track’?
'Fast track’ will involve simple qualitative and quantitative compliance tests with some scheme-specific variations based on maturity and covenant. TPR envisages this route mainly for the roughly 2,000 schemes that have fewer than 100 members and less access to advice. “If you are in ‘fast track’ we are not going to spend a lot of time on them, we are going to focus on ‘bespoke’ schemes,” said Fairs speaking at the LCP Annual Conference on Tuesday.
Some schemes will fall into the ‘bespoke’ category by choice or for not being able to comply with ‘fast track’, which will allow them to take into account special scheme or covenant features or additional risk so long as this is mitigated.
Fairs said the regulator is trying to be pragmatic on what schemes need to fulfil to fall into the ‘fast track’ category, noting that “a reasonable number of schemes” would fit into it including some larger and more complex schemes. TPR will set out the criteria for ‘fast track’ such as a view of what low dependency funding should look like and how it defines significant maturity.
On the investment side, TPR will look at whether investment risk is appropriate and plans to outline options for how trustees can assess risk under ‘fast track’; Fairs said the regulator could for instance prescribe a simple stress test and the acceptable level of investment risk suitable for different maturities and different covenant strengths.
If a scheme falls out of ‘fast track’
Schemes could fall out of the ‘fast track’ category, for example because of an employer event, but would be able to move back into it at a later date if this is no longer considered an issue, he explained.
Sanctions for schemes that fall out of the ‘bespoke’ or ‘fast track’ regime depend on the pensions bill “clarifying things”, said Fairs, but there will be a shift in the burden of proof from the regulator to pension schemes and employers about showing whether a funding plan is appropriate; previously the regulator had to demonstrate that a scheme was non-compliant.
Under the new code, “if we don’t like the level of risk, we will have the power to impose a funding plan on the scheme which will probably put them into the ‘fast track’ approach,” he added.
Concessions to employers amid Brexit turmoil?
Ahead of what many see as the beginning of an economic downturn, TPR could be under renewed pressure to go softer on employers. Pressure from the Treasury and the Confederation of British Industry during the last downturn led to the introduction of a statutory objective for TPR in 2014, to not hinder employers’ organic growth.
Now, Fairs said: “We’ve heard concerns that the new code may… increase employer cost, stifle growth or put undue pressure on those already struggling."
Fairs tried to assure employers that “affordability will remain a key component to recovery plans. Significant opportunities will remain for trustees and employers to flex funding plans – but as long as any risk taken is being adequately managed and supported and schemes are funded as well as they can be”.
To further support employers, the regulator wants to encourage greater use of contingent securities to give scheme sponsors flexibility with their cash flows.
“We’ll consult on how we can make these more accessible to all schemes while ensuring they provide the support that schemes need. One idea is to promote the use of PPF-compliant assets for ‘fast track’ purposes to help reduce the burden on schemes,” he explained.
TPR will undertake an impact assessment alongside the code next year to look at how employers are affected by the framework.
The consultation was due to be published alongside the forthcoming pensions bill, but although a Queen’s Speech is now expected to announce this on 14th October, the bill still needs to be introduced by government.
With ongoing upheaval in Westminster, the timing is now uncertain. Fairs said that “if there is likely to be a significant delay to the introduction of the pensions bill, we may choose to publish the consultation in advance of that”.
What do you think about the twin route to compliance?