Work on a new defined benefit funding regime began with a green paper in 2017, a period of record low interest rates, widespread pension underfunding and headline-grabbing scandals like BHS and Carillion, whose DB members saw their benefits reduced in the Pension Protection Fund. Since then, pension scheme funding has greatly improved, so does the case for a new DB code still stand?

 

The Pensions Regulator’s first of two consultations on the code was launched in March 2020 – just before the first lockdown brought the country to a standstill and matters from administration to sponsor contributions became much more pressing. The Department for Work and Pensions only consulted on regulations in summer 2022, and a second TPR consultation presenting the draft code finally followed at the tail end of 2022.

 

However, the focus of this new regime on securing past benefits through derisking and journey planning had, some say, at that point already been overtaken by the events set in motion by the last government’s fiscal statements. These ultimately reduced DB liabilities more than assets, catapulting many schemes to full buyout funding almost overnight. 

 

This turn of events has led some to question the rationale for overhauling the DB funding regime in a way that demands ‘low dependency’ on the sponsor at the point of ‘significant maturity’ and ‘broad cashflow matching’ from the investments. The latter, with TPR expecting a minimum of 90% interest rate and inflation hedging, has also led to warnings that regulatory investment rules are herding schemes into certain strategies, making them – and other market participants – vulnerable to crises like last autumn. 

 

“The world has changed significantly since the initial ideas for the revised DB funding code were set out in 2020, and TPR and DWP must take the time to make sure the final regulations and code are fit for purpose,” says Susan McIlvogue, head of trustee DB consulting at consultancy Hymans Robertson. 

 

As many schemes are now well funded, derisked and already on the path to buyout, most will not fundamentally change their plans as a result of the new code, she believes.  

 

“It would therefore be disappointing if the code distracts focus or disrupts well planned scheme-specific approaches because it’s not flexible enough, or because it adds a compliance burden that outweighs any long-term value,” she says. “TPR must find the delicate balance that enables all schemes to thrive.” 

 

McIlvogue cites “the rigidity of the DWP regulations and weaknesses in the code”, warning these could lead to unintended negative consequences for some schemes.  

 

A recent Hymans Robertson document lists several scenarios in which the new regulations could have a negative impact, for example, a lack of clarity about what will happen if a scheme has not reached low dependency by the time it is mature. 

 

She says neither the DWP nor TPR has yet revealed what will change in light of industry concerns over systemic risks and the impact on open schemes – with some fearing open schemes could become unaffordable under the new code. 

 

The government has previously argued that open schemes will have sufficient flexibility despite this not being set in primary legislation, while TPR suggested earlier this year that open schemes could have different technical provisions to closed schemes and said more discussions might follow. 

 

   

 

 

Announcements by the chancellor made in July now also mean the DB code sits awkwardly with the government’s view that pension funds are not taking enough risk and should invest in UK ventures. The government's encouragements to invest more in productive assets is a shift in policy direction that the new funding regime is not designed to support, observes McIlvogue. 

   

Janice Turner, co-chair of the Association of Member Nominated Trustees, agrees, saying the message to pension schemes to invest more in UK assets and the code’s pressure on schemes to derisk are "in direct conflict with each other". 

 

The fact the proposals are at odds with some of the aims of the Mansion House reforms could prompt some changes to the final regulations and code, predicts Katie Whitford, senior associate at law firm Sackers. 

 

Like McIlvogue, she criticises that rather than targeting the minority of less well run schemes, the DB funding proposals stand to have a much wider impact. 

 

However, “given their purpose, much of the content remains relevant and will no doubt remain intact. The key question will be around timing. Having already been pushed back a few times, April 2024 is starting to look very unlikely,” she adds. 

 

Now could be a chance to review and improve the code, argued Rob Chandler, a pension consultant at Cartwright. 

 

“Too often, codes just add a layer of complexities and governance that doesn’t add value to the end solution, which frustrates all parties involved,” he argues. 

 

The industry seems to think the new funding regime needs substantial work before it is implemented, or perhaps not be introduced at all, but the Pension Protection Fund is adamant a new DB code is needed. Its outgoing chief executive Oliver Morley told the Work and Pensions Committee on Wednesday that the PPF strongly believes there is still a role for a new DB funding code. 

 

“Although [funding levels] may look extremely positive at present, and we are obviously pleased about that, there certainly is still a role for a funding code,” he said. 

 

The PPF’s chief customer officer Sara Protheroe supported this view. “We are conscious that there remains a subset of stressed schemes,” she said at the same hearing, explaining that 240 DB schemes are funded below 80% on a PPF basis and have sponsors ranked 8 or worse on the PPF's levy methodology. 

 

MPs questioned if there was any realistic chance that such schemes would ever achieve full funding, even with a new DB regime. Morley replied that there need to be solutions to the schemes that are “not necessarily attractive or on an elegant path to buyout”. 

 

He said: “We need to think in policy terms about what we do with that, and we think it is a useful debate to get into. What is going to happen to those schemes in the long run because they may well not be able to solve the question of those long-term benefits? We certainly believe that there is a discussion to be had about that.” 

 

What do you think – is a new DB code still necessary? Will it help schemes that are very underfunded?

Susan McIlvogue

Janice Turner

Katie Whitford

Harus Rai

Chris Ramsey