The Pensions Regulator’s new defined benefit funding code was finally laid in parliament on Monday, after years of consultation and a dramatic upturn in the funding positions of many of the UK’s over 5,000 DB schemes since the revision started. Industry has welcomed the code but questions remain over the compliance burden it creates.

As well as the DB code, TPR has also published responses to its consultations on the code and its approach to fast track and bespoke valuation submissions, providing final fast track parameters. 

The new funding code will accompany the Department for Work and Pensions’ funding and investment strategy regulations, which will take effect for valuations from 22 September this year.

Under the new code, which replaces the previous one from 2014, TPR will expect trustees to determine:  

 
Executive director of market oversight at TPR, Neil Bull, said the DB funding code “strikes the right balance between security and flexibility for scheme specific funding and investment approaches in the interests of members and employers”.

He said the new code will improve the DB pensions system, adding: “Trustees, their advisers and sponsoring employers should read the new DB funding code to appraise themselves of what TPR sees as good practice.” 

With some debate over the treatment of open DB schemes preceding the publication of the code, TPR noted that seven in 10 DB schemes are closed to future accrual and just 4% remain open to new members.  

“The revised DB funding code has necessary flexibilities to be relevant and supportive of all DB schemes, including open ones,” it stated. 

While many schemes are currently well funded, TPR was also keen to stress that the code “outlines principles and requirements to support schemes no matter what their financial positions in the months and years ahead”.     

UK DB schemes currently have a Pension Protection Fund funding level of 149.4%, and manage about £1.3tn worth of assets.  

The fact parliament rises on Tuesday, returning 2 September, means the code will not have had its required 40 days in parliament by the time the regulations must be applied. Schemes that are keen to move ahead with valuations will therefore need to hope that they can consider the code more or less final despite this. 

TPR said it recognises there will be a gap in timing, advising schemes with valuation dates in this period to use the new code as “the base”.   

It said it will communicate with affected schemes and take a “reasonable regulatory approach” to their valuations.     
   

 

The pensions industry, which has been eagerly awaiting the document, is pleased to finally have clarity after years of consultations and, following a continuous rise in discount rates in 2022, growing uneasiness about certain aspects of the code that were seen to leave too little room for investment risk and diversification.

The Pensions and Lifetime Savings Association has welcomed the code. Deputy director of policy

Joe Dabrowski

said: “It is most welcome that TPR has reflected on and updated its requirements given the vast improvement in scheme funding since the inception of the code, though the expectation that schemes could use the just-laid code in this autumn valuation cycle seems optimistic. A slower timetable would be more practical.”  

He said the code provides clarity and flexibility around ‘matching assets’ and by making the low dependency investment allocation a notional rather than actual one. The code states: “While we anticipate the actual investment allocation and the notional investment allocation will be the same or similar for many schemes, trustees are not required to invest in line with this notional investment strategy.” 

Dabrowski was also positive about TPR allowing trustees to take account of future accrual and new members for a longer period when determining the future maturity of the scheme.  

“This prudently reduces the liabilities of open schemes compared to an equivalent closed scheme,” he remarked, saying it was also helpful that TPR has included a new ‘open schemes’ module signposting the code guidance and expectations for open schemes. 

In addition, he said the regulator “appears to have recognised the benefits of greater flexibility for trustees in assessing the strength of the sponsoring employer according to specific circumstances” but seemed disappointed that a separate section for multi-employer schemes has not been provided.  

Some, however, say there is limited benefit from having a ‘notional’ asset allocation for less mature schemes because of how much the risk and return of specific asset classes vary over time.  

“One only has to look at how much credit spreads have moved over relatively short periods to see how poor a predictor of actual long-term asset allocation the [low dependency investment allocation] may prove to be,” said Shelley Fryer, an associate partner at Aon.  

Iain McLellan

, director at consulting firm Isio, said it was encouraging to see TPR moving to a more principles-based approach that allows some flexibility. He was especially pleased about “a more pragmatic stance” on investment strategy, employer covenant and open schemes. 

  

However, McLellan pointed out that TPR is still due to issue updated employer covenant guidance, as well as the final format of the statement of strategy that DB trustees will need to produce under the funding regulations. 

Others are wary of the compliance burden, particularly for small schemes.

Rob Archer

, head of actuarial services at TPT Retirement Solutions warned of greater costs even for schemes that are already largely following the code’s main principles, and which for smaller schemes could become too great.  

 

“As a result, the funding code could be a catalyst that encourages trustees of these schemes to look to buy out, or to consolidate into a master trust or superfund,” Archer predicted.

David Hamilton, chief actuary at consultancy Broadstone expressed a similar view: “We hope that our feedback regarding the burden on smaller schemes is reflected not just in the code itself – which regularly mentions a proportionate approach – but in the way in which the new regime is monitored and enforced.”

The code’s publication follows two consultations in the past four years, in March 2020 and December 2022, though the regulator began working on a revised code before that.

Its code includes greater flexibility, in line with the DWP’s regulations. The regulations had dropped a controversial requirement for ‘broad cash flow matching and altered how scheme maturity must be calculated among others, using a fixed date of 31 March 2023 to avoid fluctuations in maturity.