The Pensions Regulator’s thinking on its ‘fast track’ route in the new defined benefit code has changed, executive director of regulatory policy, analysis and advice David Fairs has said, as it will now only act as a filtering mechanism, without being in the code itself. TPR will be consulting on this, as well as seeking views on potential changes to the government’s draft funding regulations.  

 

Fairs also reassured trustees that significantly mature schemes will still be able to invest in growth assets, rejecting accusations following the gilts crisis that regulatory policy was ‘herding’ schemes into bonds, making them more vulnerable to shocks in these markets. 

 

TPR aims to publish the draft funding code this week and certainly before Christmas, Fairs said, speaking at a webinar organised by consultancy Barnett Waddingham on Tuesday.  

 

Unusually, it will be out before the Department for Work and Pensions regulations have been finalised, as TPR is keen to start schemes off using the new code, even though it could change if the regulations are tweaked. The new code is expected to apply to valuations after October 2023, which is when the regulator hopes it will come into force. 

 

It appears regulations could well be redrafted. Alongside the code, TPR will publish a consultation on where the government’s regulations could differ from those published earlier this year, to “explore people’s feelings” about potential changes, said Fairs.  

     

 

   

   

 

As well as the above and a feedback document, the 200-page pack that will be consulted on for 14 weeks will include a new consultation on the fast-track concept, in what Fairs described as “quite a big change” in how the regulator envisages this. 

 

“We were looking at fast track as a benchmark. Our views have changed, we are now going to use it as a filtering mechanism,” said Fairs. In a blog published on Tuesday, he said that fast track “is not a legislative tool so is not included in the draft code” but that it would remain a key part of the funding regime.   

 

The funding code will apply to all DB schemes, he explained at the webinar, but the change means that “in terms of schemes we want to engage with more intensively, fast track will be a means of filtering actuarial valuations that come to us”. If the valuations meet the fast-track conditions, TPR would be unlikely to take action, he said. 

 

The three-step filtering mechanism will now include technical provisions, the Pension Protection Fund’s investment stress test and a capped recovery plan length – but not covenant. 

 

TPR is doing away with covenant grades 1-4. “Covenant, in terms of the way schemes look at their assumptions, there is probably less variability than you might expect. There is a challenge around that,” said Fairs.  

 

“There is also a challenge in that covenant grading in some respects is quite subjective. So sometimes we do find ourselves in debate with advisers and trustees around covenant grading, so we have removed that from fast track,” he added. 

 

However, there will be details in the draft code on how trustees should examine covenant, and TPR will publish updated covenant guidance next year. 

 

Within fast track, TPR will look at technical provisions as a ratio of low dependency liabilities, which would need to be 100% at the point of significant maturity, most likely applying a discount rate of gilts + 0.5%, according to Fairs. 

 

“We'll prescribe some financial assumptions, others will be scheme specific, that is the feedback we got from the first consultation,” he said.  

 

Fairs noted that the regulator has “dialled down” the level of leverage in liability-driven investments that it will deem appropriate in fast track.  

 

The third element in fast track is the recovery plan period – which the regulator said “has to be below a certain time”, likely six years or less before significant maturity and three years or less if the scheme is considered significantly mature. 

 

Fairs disputed that a requirement to match cash flows and have highly resilient investments – as set out by the DWP’s draft regulations – will translate to a requirement to hold bonds and divest from illiquid or growth assets, as some in the industry have suggested. 

   

    

“I don't think that was the policy intent behind the drafting. It’s not the way we’ve interpreted it in the code,” he said. While schemes can invest in bonds, he said property and infrastructure were also acceptable, and even at the point of significant maturity, “we think it is still feasible to have up to 20-30% in growth assets”, although the risk would need to be hedged so as not to undermine the cashflow and resilience principle. 

 

Fairs denied that the code will ‘herd’ schemes into gilts and bonds, making them more vulnerable to gilt market shocks like that seen in late September. He argued that even under the current, more flexible, regime, almost three-quarters of aggregate assets are held in bonds.  

 

“There has already been a significant move to bonds, probably greater than would be required by us... so I don’t recognise that the new code would drive herding, I think there are other things at play,” he said. 

   

 

Will the new funding regime prompt changes to your journey plans and/or investments?