The future defined benefit funding regime is intended to be more in line with the Pensions Regulator’s draft DB code than the government’s proposed regulations, TPR has said, stressing that the code is principles-based, but some in the industry have called for an update of the regulator’s statutory objectives. 

  

Speaking at the Pensions and Lifetime Savings Association’s investment conference in Edinburgh on Wednesday, Rachel Pinto, a partner at law firm Herbert Smith Freehills, said when the draft funding regulations came out, there was concern in the industry that they were too prescriptive. 

  

The draft DB code has introduced more flexibility, which was welcome, she said, but added: “What we need to avoid is uncertainty.” 

  

The final regulations should be updated to permit the same level of flexibility as the code, argued Pinto. 

  

“If this got to court, there is a real risk that the court would take the narrower interpretation by looking at the regulations,” she warned. 

  

Fred Berry, lead investment consultant at the regulator, sought to reassure the assembled industry representatives, saying both TPR and the DWP recognise the discrepancies between the draft regulations and the draft code and agree on which interpretation should prevail. 

  

“The intent of both of us is much more in line with what's in the draft code than what's in the regs. There were just particular circumstances that led to the regs being published in the form that they are,” he said, adding: “It's being worked on, watch this space.” 

  

  

The new funding rules will also bring the sponsor covenant into the picture to a greater extent, with the regulator due to publish covenant guidance this year. TPR has changed some of its 2020 proposals, when the first DB code consultation was published. Among others, it decided not to apply any covenant grades to assess ‘fast track’ valuations but will still expect trustees to assess the employer covenant by examining the sponsor’s cashflow, prospects and the risk of insolvency, and contingent assets, detailing in the code how trustees should approach this.  

  

But speaking at the conference, Martin Hunter, head of integrated funding at Railpen, which manages assets for the Railways Pension Scheme, said he was concerned about making covenant more narrowly prescribed. 

  

Tailored covenant advice could be “one of the most valuable bits of advice that a trustee can receive”, he argued, and criticised what he suggested could become a more standardised process. 

  

“It is incredibly difficult to do that in a mechanistic way based on a few ratios from accounts,” Hunter said. 

  

Berry did not think TPR was being overly prescriptive on covenant, pointing out that the word ‘proportionate’ appears in the code several times. 

  

“For those of you who want to know… what our covenant guidance might look like, also watch this space, I'm told that something is likely to appear in the autumn on that,” he added. 

  

A draft statement of strategy – a document schemes will need to produce under the new regime – will also become available then. 

  

  

The Railways Pension Scheme is an open scheme with about 100,000 active members, and Hunter’s main complaint was the question of how open DB schemes will be treated under the new regime. 

  

“One of our biggest concerns is the implications of a more prescriptive approach for open schemes. There aren't that many of them left anymore, but the ones that are still there are open for a very good reason. They are not open just because the employer and the trustees haven't got round to thinking about closing it in the last quarter of the century,” he said. 

  

The industry has previously warned that requiring open schemes to derisk investments, for example, would quickly lead to their closure, as it would become more expensive for a sponsor to fund the scheme. 

  

While he said there have been “positive developments” around allowance for new entrants and open DB schemes, Hunter believes “a better approach would be to recognise that it is not right to ask an open scheme to assume that it is going to mature and get to some low dependency position in the future”.  

  

But the Pensions Regulator was less conciliatory in tone around open schemes than the other issues raised. Berry said he understands their unique circumstances, but added: “Nonetheless, it is one of the principles in the code that we do expect security of accrued benefits in open schemes to be comparable with that in closed schemes.” 

  

He added this didn’t mean having the same technical provisions, and that more discussion might follow on what this means in practice. 

  

This approach to funding, Hunter said, is driven by the statutory objectives given to TPR by government, which include the protection of past service benefits and of the Pension Protection Fund.  

  

A rethink of these objectives was needed, he said. “There should be more focus on member outcomes as a whole. If you're a 45-year-old in an open DB scheme at the moment, the next 20 years of accrual are just as important as the last 20,” he said. 

  

“It's about the pension you get at the end. So I think changing the regulator's statutory objectives would be a very sensible thing for government to look at.”
   

      

John Chilman

Tim Smith

David Fairs

Steven Taylor

Tim Middleton

Iain McLellan