DB funding regs welcomed but industry wants to see final TPR code 

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Funding regulations for defined benefit schemes have finally been published, with several changes to the 2022 proposals, after industry concerns over herding into low risk assets and the Treasury nudging schemes into taking more investment risk by allocating to private markets via its Mansion House reforms. Welcoming the changes, the pensions industry is keen to see the finalised funding code and covenant guidance.  

Pensions minister Paul Maynard has said the government will legislate for the regulations to come into force from April 2024, applying to scheme valuations from September 2024. The new regulations will underpin the future DB funding code and provide the detail to the Pension Schemes Act 2021.   

The original consultation had proposed that DB schemes should have a funding and investment strategy and report this to the Pensions Regulator in a DB statement. A requirement for them to have a trustee chair where schemes do not already have one was also included.  

In addition, it introduced a requirement for schemes to plan to be in a position of low dependency by the time they are significantly mature and have ‘broad cashflow matching’. This was viewed by many as pushing pension funds towards low-risk assets – a thought that found few supporters after the liability-driven investment crisis had put concentration risks arising from DB ‘derisking’ into sharp relief in autumn 2022. The government has now dropped this requirement from the final rules following industry feedback. 

Respondents to the consultation also raised concerns around flexibility and how scheme maturity is measured, according to the Department for Work and Pensions, and were sceptical of the affordability principle.  

While the DWP said commentators were generally reassured on flexibility after seeing the regulator’s draft funding code, it has included statements on flexibility in the regulations. They have now been revised, with the DWP saying this was to: 

 
The measure of maturity has also been tweaked. Although duration of liabilities remains the actual measure, the regulations now prescribe 31 March 2023 as a fixed date on which economic assumptions used to calculate maturity must be based. 

“This will have the effect of fixing the economic conditions used which will reduce volatility in the duration of liabilities measure. This will provide trustees with greater stability when planning and managing scheme funding and investments and offer flexibility to pursue plans that are not inextricably tied to fluctuations in economic conditions,” the DWP said.
Industry feedback and the Work and Pensions Committee’s inquiry into LDI will have played a role in softening the DWP's stance, but the revised rules also come against the backdrop of the Treasury's Mansion House reforms – which aim to kickstart the UK’s flatlining economy, among others by increasing the flow of pension savings into higher risk UK assets. 

DB code is now needed, says industry


The industry has welcomed the changes in the final regulations. Nigel Peaple, director of policy & advocacy at the Pensions and Lifetime Savings Association, said the new regulations suggest that DWP has listened to industry feedback, giving greater flexibility, especially for open DB schemes. 

“Importantly, it also clarifies that DB schemes can take appropriate levels of investment risk where supportable by the employer covenant,” he added, including allowing mature schemes to diversify investments.  

"These changes signify positive strides toward a more adaptable and efficient regulatory framework." 
 
The Society of Pension Professionals was positive but cautioned that the details in the final funding code will be key for the application of the rules. It welcomed the new way to measure significant maturity, flexibility for open schemes, and the fact that the expression ‘broadly matched’ has been dropped from the regulations, and that employer growth is being factored in. 
 
“Nonetheless, we have concerns about the regulations appearing to apply identical investment risk rules across varying covenant strengths beyond the point of significant maturity: more flexibility may be appropriate for stronger covenants in this situation. The SPP urges TPR to address this in their code and provide further guidance,” the society added. 
   
It also criticised that the regulations do not address concerns about how trustees should proceed where they cannot reach agreement with the employer on the funding and investment strategy.   
 
“SPP believes that it is essential that TPR’s code resolves this to prevent potential disputes over trustees’ ability to proceed with their chosen investment strategy, which could have a detrimental effect on scheme governance, and potentially on member outcomes,” it said.   
 
Others also stressed the need for the funding code to be finalised to provide clarity – and for this to happen before the new regulations are applied to scheme valuations in September.  
 
“It’s a shame the regs and ‘final’ code were not published together – we just hope the delay in issuing the code is short and that its final version does not re-open new contradictions,” said Steven Taylor, chair of the Association of Consulting Actuaries. “And it will be interesting to see how all of this fits with the consultations ahead on surplus extraction and consolidation.”  
 
This year may be the one a new funding regime, in the making for more than six years, will finally come into force. However, “this all assumes that there is no unexpected intermission caused by a general election once the code is laid before parliament, with the PM’s current working assumption being that this will take place in the second half of the year”, noted Sackers partner Janet Brown. 
  
The Employer Covenant Practitioners Association welcomed the revised regulations, which embed covenant in legislation for the first time and allow for various considerations around employer outlook but said covenant guidance must be published soon. 
  
“It is... concerning that there is a jigsaw-type effect with the revised code and as yet unseen covenant guidance yet to be released by TPR,” said Guy Mander, chair of ECPA. “We hope these documents will follow shortly and complement the revised regulations in time to be effective for actuarial valuations from 22 September 2024 onwards.” 

Doubts over illiquid investment and proportionality 


Will the new flexibilities encourage DB schemes to invest in productive assets, like the chancellor is hoping?   

Iain McLellan, head of research and development at Isio, noted while trustees and sponsors will welcome the new flexibilities, “we doubt the revisions will shift the dial in encouraging defined benefit schemes to risk-up and invest to support the government’s productive finance agenda”.  

The other question is around proportionality – the code was originally created to strengthen what was a poorly funded DB sector before interest rates rose, but the picture has since changed, with about 1,000 schemes thought to be at buyout funding level. 

Paul Houghton, head of actuarial consulting at Barnett Waddingham, called on TPR to therefore exercise the discretion it has been given by the new regulations. He said: “A remaining concern is therefore whether the additional compliance burden will prove justifiable for what is a small and reducing number of poorly funded and run schemes. As the baton passes to the Pensions Regulator for the final leg, we encourage TPR to make good use of a newly inserted clause in the regulations that will allow it to exercise discretion in respect of the amount of information that schemes will need to provide in their statement of strategy.”
   
 
   
   
   
What is your view on the new DB funding regulations?
Iain McLellan
Georgina Stewart
Steven Taylor
Nigel Peaple
 

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