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Major consultation on clearer DB funding standards launched

Ref: PN20-09

Issued: Tuesday 3 March 2020

The Pensions Regulator (TPR) has today published the first stage of a major consultation on its revised code of practice for defined benefit (DB) funding.

David Fairs, TPR’s Executive Director of Regulatory Policy, said: “The launch of our consultation on a clearer framework for DB funding is a significant moment for DB schemes. 

“We want to make sure pensions have the necessary long-term approach to ensure savers get the benefits they expect. Today we are setting out our expectations about how trustees should manage risks in an integrated way when planning their scheme’s long-term funding and investment strategies.”

The consultation asks the industry for its views on proposed principles for the funding of DB schemes and how they could be applied through more detailed guidelines. This will enable TPR to set a clear benchmark for good standards of compliance. The revised DB code will implement measures introduced in the Pension Schemes Bill laid in Parliament in January.

It is expected that the revised code will come into force at the end of 2021.

TPR is proposing a twin-track compliance approach to valuations, both options of which will enable schemes to meet their legal obligations.

Under the proposals, trustees will be able to choose either a ‘Fast Track’ or a ‘Bespoke’ approach to completing and submitting a valuation of their scheme.

If a trustee can demonstrate their valuation meets TPR’s guidelines for a compliant scheme, it can follow the more straightforward but prescriptive Fast Track approach.

For those who cannot meet Fast Track guidelines, or choose not to, there will be a Bespoke approach offering greater flexibility. Trustees will have to submit more supporting evidence on their approach, including how they propose to manage additional risk, and may receive greater regulatory scrutiny.

David Fairs said: “With most DB schemes closed to new members and / or future accruals, we can expect them to be significantly mature in 15 to 20 years’ time, with the majority of their members retired. These schemes will be more vulnerable to risks associated with poor funding levels and shorter investment horizons. Therefore, trustees should aim to reduce their scheme’s reliance on the sponsoring employer as they mature.

“We want to be confident our expectations are effective and appropriate for trustees and in turn the savers in these schemes.”

Today’s consultation is open for 12 weeks and will close on 2 June 2020. During the next three months TPR will be meeting the industry to discuss its proposals, including at stakeholder events to be held later this month. A second consultation will be launched at the end of the year looking at the draft funding code itself.

Notes for editors

1. Overarching themes of the consultation are:

a. Long-term planning: The Pension Schemes Bill will introduce a requirement for trustees to set a funding and investment strategy (described as ‘long-term objective’ (LTO) in our consultation). A cornerstone of this consultation is our expectation that trustees should identify a scheme-specific LTO so that by the time the scheme is significantly mature (15 to 20 years from now for a scheme of average maturity), it is fully funded on a low dependency basis (potentially in the range of Gilts +0.5% pa to Gilts +0.25% pa for Fast Track compliance) and has investments highly resilient to risk. Trustees are expected to set a prudent journey plan to the LTO.

b. Employer covenant: We are consulting on the extent to which the employer covenant should remain a key aspect of scheme funding, including how it should be assessed and for how long reliance can be placed on it. We are also consulting on alternative support (such as contingent assets and guarantees) and are seeking views on what reliance should be placed on this support, as well as what characteristics it should have in order to be recognised for funding purposes.

c. Investment risk: We expect all schemes to take a level of investment risk that is supportable and we set out proposals for how trustees could demonstrate whether the risk in their investment strategy is supported (for instance through a simple stress test).

d. Recovery plans: Where a funding shortfall arises, this should be funded by an appropriate recovery plan. We propose employer affordability should be the key factor which determine the appropriate length and structure of the recovery plan.

e. Open schemes: We also consult how the framework should apply to open schemes, including our expectation that members’ accrued benefits should have the same level of security as accrued benefits in closed schemes.

3. TPR is the regulator of work-based pension schemes in the UK. Our 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 TPR’s functions under Part 3 of the Pensions Act 2004 only).

Press contacts

David Morley

Media Officer (DB)
01273 662091

Matt Adams

Senior Media and Parliamentary Manager
01273 662086

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