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David Fairs' speech at the AON Pensions conference

Tuesday 3 March 2020

[Please note: the transcript of speech may differ slightly from delivery.]


Hello and thank you for inviting me.

It seems like I’ve been speaking at events for many months, talking about the new Code, why we’re doing it, what’s in it, what it means for all of you.

And whilst there is so much happening in the regulatory space just now, I do want to focus today on the new funding code.

Not least because I’m looking forward to hearing what you have to say about it.

Right from the beginning we at the regulator knew we couldn’t develop this Code in an ivory tower in our offices in Brighton.

That’s why we’ve been out speaking with the industry and why we are having two formal consultations on the Code.

And although I don’t usually like to show favouritism, as Paul says, I have chosen you as my preferred audience to launch our first consultation.

For those of you, who haven’t already noticed it was published today - at 7:30 this morning - and will run for three months.

I warn you the document is nearly 200 pages long and is not light reading. But my policy team have also produced a quick guide and an executive summary to help you digest and understand the detail.

Today I’ll give you a quick overview of what’s in it, and I will pick out a few of the points that haven’t been talked about too much already.

It’s so important that we get this Code right, that it works in practice, in the real world, and that it does the job of better protecting the savers.

It will determine how all of you - trustees, employers and advisers - approach scheme funding for years to come. And it will determine how we at The Pensions Regulator (TPR) interact with you.

We can only get it right with your input. We want you to let us know if there are any workability issues or unintended consequences arising from what we’ve proposed.

I also want to thank you for the time and energy you are putting into this. Not just for coming to events like this, but also for the time you are going to spend reading and digesting those 200 pages.

Let’s take a step back from the detail for a moment and look at why there was a need for the new Code in the first place, and what we’re aiming to achieve with it.

Why the need for a new Code?

The government’s white paper on defined benefit (DB) funding said that the current approach is not broken, but that there is room for improvement, and in particular, for greater clarification.

We absolutely welcomed that, in fact we’d been calling for it for a while.

There were several factors that led to the White Paper and ultimately the new Code: The DB landscape is shifting. Schemes are maturing a lot over the next 10 years, and for many schemes we’re nearing the point where they will be paying out their highest level of benefit.

From our research we know that schemes will potentially find financing their scheme challenging, especially if they are paying full benefits, they are cash flow negative, they currently have a deficit and they are reaching a high state of maturity.

Many schemes that closed to new members some years ago will have a high proportion of pensioner members and that proportion is increasing every year. Those schemes need to be acknowledging that situation now.

So we are in a situation where many schemes are nearing a high state of maturity in the next two decades.

We began to address that in this year’s funding statement, and many of you will have noticed that shift in emphasis, and the focus on having a long-term strategy.

Another reason we needed tweaks to the regulatory framework is that there are a small number of employers and schemes that push the boundaries and abuse the flexibilities that are available.

So the new Code needed to address that too.

The lack of clarity, particularly around the definition of “prudent” and “appropriate” was causing confusion. That doesn’t sit well with our aim of being clearer and quicker and may ultimately put savers’ pensions at risk.

Those were two of the key drivers - the lack of clarity and the shifting landscape towards maturity.

What’s in the Code?

a) Twin track approach

We are proposing a twin-track compliance approach to triennial valuations, and both options will enable schemes to meet their legal obligations.

Trustees will be able to choose either a ‘Fast track’ or a ‘Bespoke’ approach to completing and submitting a valuation of their scheme.

We want to set out clearer expectations over what is meant by “prudent” and “appropriate”.

We have spent time discussing with employers and trustees whether the funding plan they’ve come up with is sufficiently prudent. Fast track gives the opportunity to provide those who want more prescription, exactly that.

But also to put a marker down of what we think is prudent and appropriate for those schemes of differing maturities. So fast track is a series is much more clearly defined and will act as a bench mark.

For those schemes that want to go down the bespoke route, we have retained the flexibility inherent in the current system but, by comparing their funding approach to what we’ve set out in fast track, this means we have a yardstick against which to judge their entire funding package (such as whether a recovery plan is too long or if there’s too much investment risk - compared to our fast track guidelines).

We already see that schemes that set a long-term objective and have a clear journey plan tend to operate much better governance and risk management.

So to some degree the new funding Code will enshrine the good practice that we already see in better governed schemes across the market.

It will set a clear marker for what prudent and appropriate looks like from our perspective.

But it also gives schemes a choice. Those that want prescription and a prescribed approach will have one. And those that cannot or choose not to go down the fast track route, will be able to continue to use the flexibilities in the system - provided they can evidence how additional risks are supported or mitigated.

Those schemes that abuse the current flexibilities in the system are likely to find life more difficult.

Schemes that have a strong employer will not be able to use that to have lower technical provisions (TPs), a back end loaded recovery plan, take account of investment out performance and still pay the deficit back over a long period.

It’s worth highlighting that the new legislation and the framework we are consulting on is built around the expectation that trustees use an integrated risk management approach. We’ve been asking trustees for a long time to have an integrated approach, and while some trustees have, many haven’t. With the new legislation there is no option but to have an integrated approach.

I’d now like to highlight just two of the principles, which perhaps haven’t been discussed as much as some of the others.

b) Employer covenant

The consultation raises several questions around the employer covenant, including:

  • How much it should remain as a key aspect of scheme funding?
  • For how long should covenant be relied on?
  • What reliance should be placed on other support, such as contingent assets and guarantees?
  • What characteristics should that support have in order to be recognised for funding purposes.

We think that fully insulating schemes from employer insolvency - for example by requiring funding on a risk-free basis - would be too costly and is not consistent with Part 3 funding.

Instead we’ve tried to strike a balance between the security of member benefits and costs to employers. So we are proposing to allow trustees to continue to place some reliance on the covenant.

That raises the question of where exactly that balance lies, and that will be the focus of our second consultation, later in the year.

For now, we’ve looked at how schemes integrate covenant support, particularly in fast track guidelines.

We have assumed that reliance could be placed on the covenant in fast track TPs via the discount rate, which is similar to current practice.

However, we are proposing that some limits should be placed on that reliance and that the limits are based on covenant visibility.

We think this typically doesn’t extend beyond three to five years.

How should the covenant be assessed?

We’re proposing two main options:

i) retaining the current holistic approach (but with further clarifications - such as what we expect to factor into an assessment, and the characteristics of different covenant grades); or

ii) simplifying employer covenant to a formal calculation or metric

We’re proposing to keep our current covenant grading system - CG1-4 for the fast track guidelines. But we do recognise that there are arguments for increasing the number of ratings, so we welcome your views on that as well.

c) Investment

The investment strategy is an important factor in terms of the success of the funding strategy and the risk to member benefits.

We don’t want to, and will not, tell trustees how to invest. But we do want to ensure that investment risk is appropriate and supported.

We are consulting on how to regulate the legislative requirement that a scheme’s investment strategy and asset allocation over time should be broadly aligned with the funding strategy. This includes consideration of the technical provisions and journey plan.

We think that at the point of significant maturity, the asset allocation should have a high resilience to risk along with sufficient liquidity and a high average credit quality.

The consultation sets out proposals for how trustees could demonstrate whether the risk in their investment strategy is supported.

For example:

  • Should investment risk be measured relative to the liabilities or from a reference portfolio representing a typical liability profile?
  • How should risk be measured? Should it be through a simple stress test, which we could align to the Pension Protection Fund (PPF)?
  • What are acceptable levels of investment risk for different maturities and covenant strengths?

We also look at how we could define some fast track guidelines for credit quality and liquidity.


From our experience of reviewing thousands of scheme valuations, we know that some are already applying good practice in relation to journey planning and risk management.

They’re already doing it and they’re documenting their approach.

So we’re not expecting our proposals to be an extra burden for those schemes.

However, for those schemes that have been running excessive and unjustifiable levels of risk, there could be significant impacts.

We really want to get this right. And to do that we need input from you - trustees, employers, advisers, scheme managers.

The consultation will be open for three months. You’ll find the full document, the quick guide, the executive summary and details of how to respond on our website.

Please do get involved and send us your thoughts. There is a wealth of experience and knowledge in this room and we’re keen to hear from you.

Let’s get this right together and protect savers’ pensions.

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