Defined benefit consultation: setting a balanced approach
Monday 2 December 2013
Striking a balance between sponsoring employers’ pension funding obligations and their ability to invest in sustainable business growth is at the heart of a consultation on defined benefit (DB) regulation published today by The Pensions Regulator.
The consultation sets out how the regulator intends to balance its new objective to minimise the impact on employers’ sustainable growth, with its existing DB funding objectives. The new objective is contained in the Pensions Bill 2013, currently before Parliament. The content of the consultation also reflects how the regulator’s approach to DB funding has evolved over the last eight years in light of its experience, and that of the pensions sector, in managing the risks in DB schemes.
The consultation includes:
- A draft funding code of practice that provides practical guidance to help pension trustees to meet the requirements of scheme funding legislation.
- A draft regulatory strategy setting out at a high-level the regulator’s risk-based approach to tackling issues in DB pension schemes.
- A draft funding policy describing in more detail the regulator’s intended approach to regulating DB funding issues.
Stephen Soper, the regulator’s interim chief executive, said:
“We welcome the transparency that our new objective on employer growth brings to the DB funding regime and we look forward to working with trustees, employers and the wider pension community to ensure that it is implemented in a balanced way.
“Investing in sustainable business growth is central to being able to provide a long-term future for any business and its pension plan. The best support for a DB pension is a strong employer and effective trustees working together to manage and balance the risks to their business and scheme.
“Our revised code of practice emphasises the importance of pension trustees and employers working collaboratively to establish viable, long-term funding plans. We place a strong focus on education and enablement to help schemes to achieve appropriate outcomes. The needs of employers and schemes can be reconciled in the vast majority of cases through good working relationships without the need for our involvement.”
Risk is part of the DB landscape and the regulator expects trustees to understand and manage risk rather than requiring them to eliminate it from their scheme. To help trustees in this area, a key focal point of the draft code is on taking an integrated approach to managing the key risks that influence a DB pension scheme’s chances of paying its benefits in full: namely funding, investment and the employer covenant (the employer’s ability to meet its obligations to the pension scheme).
As signalled in its May 2013 funding statement, the regulator has also moved away from a rigid focus on discrete triggers such as recovery plan lengths and discount rates and has adopted a suite of risk indicators built around the key areas of employer covenant, investment and funding. Trustees who manage these three areas, alongside good scheme governance, are less likely to be the focus of regulatory intervention.
The regulator intends to hold a series of events and meetings with key industry stakeholders and experts during the consultation period in order to gather their feedback on both broad principles and narrow technical issues. The consultation period closes on Friday 7 February 2014. It is anticipated that the new code will be in force by July 2014 and will apply to schemes undertaking valuations from that time.
Once the code has come in to effect, the regulator intends to produce more accessible ‘quick guides’ for trustees and employers and to update its Trustee toolkit, e-learning modules, and other regulatory guidance material for DB schemes.
- The draft DB code of practice 3, once in effect, will update the previous version of the code which has been in place since 2006. The DB funding policy will replace the 2006 regulatory statement ‘How The Pensions Regulator will regulate the funding of defined benefits’.
- For some employers, growth is a real prospect, while for others it may be more about maintaining their position or limiting the effects of a declining business. The regulator’s approach recognises that growth means different things for different employers, and between different sectors of the economy (such as charities).
- The regulator’s approach is to achieve its objectives through education and enablement in the majority of cases. A significant proportion of cases will be resolved by early intervention and dialogue. Enforcement is usually a last resort, but the regulator will use its powers where appropriate to do so.
- The regulator is taking a more proactive, targeted and segmented approach to regulating DB schemes - focusing its interventions on the areas of greatest risk and where it can have the greatest impact. It is likely the regulator will investigate fewer cases than in the past, but those cases are likely to be more complex and in-depth.
- The Pensions Regulator is the regulator of work-based pension schemes in the UK. It has objectives 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; and to maximise employer compliance with automatic enrolment duties. The Government is currently legislating to give the regulator a new objective 'in relation to the exercise of its functions under Part 3 only, to minimise any adverse impact on the sustainable growth of an employer'.
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