The Pensions Regulator (TPR) has published its draft funding code of practice for defined benefit (DB) pensions schemes and a consultation document.
The 14-week consultation sets out that schemes will be expected to set a long-term objective and a journey plan to get there. It is expected that schemes will reduce reliance on their sponsoring employer as they reach maturity. It will require trustees to improve risk management and raise the bar for evidencing supportable risk taking.
The code will support trustees, sponsoring employers and their advisers to manage their pension schemes and will replace the current code, introduced in 2014. It includes key expectations in relation to:
- trustees setting a plan for how they will achieve low dependency on the employer
- setting a journey plan to reach that point
- assessing the employer covenant as a key underpin for the level of risk that is supportable on that journey – considering cash, prospects and contingent assets
- setting their funding assumptions consistently with those plans
- open schemes allowing for future accrual where they can justify their approach
- assessing reasonable affordability when determining the appropriateness of recovery plans
The final regulations and code are currently planned to come into force in October 2023.
A new twin track regulatory approach will help TPR filter out schemes that require minimal engagement (estimated to be around half of schemes, as at March 2021), and identify and intervene when there are concerns schemes are not complying with regulations.
David Fairs, TPR’s Executive Director of Regulatory Policy, Advice and Analysis, said: “In line with DWP’s draft regulations, our draft code is clear that all DB schemes should have the necessary long-term funding approach to ensure savers have the best chance of receiving the benefits they expect.
“We want to provide schemes with the continued flexibility around funding to suit their circumstances, while requiring trustees to think carefully about risk management to improve security for their members.
“We have worked hard to ensure the draft code’s principles reflect the 127 responses we received to our first consultation on the code, the clarity we now have on the draft regulations, and our modelling and analysis. The code sets out our expectations in relation to how trustees should comply with legislative requirements.
“I urge trustees and their advisers to read our consultation and respond.”
The new draft code is forward looking so only schemes with valuation dates on or after commencement will be affected. Trustees currently working on a valuation should continue using the code currently in force.
Along with the draft code, TPR is also publishing a consultation document on its Fast Track and a twin track regulatory approach, as well as a response to its first funding code consultation.
Fast Track is not mentioned in the legislation so is not included in the draft code itself. It is a regulatory approach set out by TPR to bring greater clarity to its approach to the scheme specific DB funding regime.
Trustees following Fast Track will be asked to evidence how their scheme meets three Fast Track criteria – surrounding technical provisions, an investment stress test and prescribed recovery period.
Bespoke is an equally valid approach and may be more appropriate for schemes following a more complex funding and investment path but also those unable to meet Fast Track criteria. Bespoke gives trustees the flexibility to select scheme specific funding solutions if the funding approach and actuarial valuation meet legislative requirements and key principles set out in the code.
Both consultations will close on Friday 24 March 2023.
Notes for Editors
- We issued a blog about the draft DB funding code.
- The Pension Schemes Act 2021 will introduce a requirement for trustees to set a long-term objective for their scheme.
- The Pensions Regulator is the regulator of work-based pension schemes in the UK. Its statutory objectives are: to protect members’ benefits; to reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only).
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