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Fiona Frobisher's presentation at the ACA Gatwick Conference

Published date: Friday 11 January 2019

TPR Future Regulatory Approach

Fiona Frobisher, Head of Policy at TPR

The Department for Work and Pensions (DWP) published a white paper Protecting Defined Benefit (DB) Pension Schemes on 19 March 2018. This set out changes to give The Pensions Regulator (TPR) new or enhanced powers to protect occupational pensions, improving the way that scheme funding is understood and regulated and introducing an authorisation regime to enable DB consolidators, and collective defined contribution schemes to enter the market.

This presentation will set out what developments in these areas mean for how The Pensions Regulator may regulate DB schemes in future as well as touching on what is being done differently already.

Three key takeaways

  • Key to better oversight on corporate transactions is employer discussing the likely impact on scheme with trustees.
  • Key objectives for changes to the funding framework flow from DB White Paper remit:
    • better long-term risk management
    • transparency and accountability
    • enforceability
  • TPR is working with consolidators (superfunds) and those looking to enter consolidators ahead of new legislation.

Better oversight for corporate transactions includes both

  • Changes to the notifiable event framework:
    • sale of a material proportion of the business or assets of a scheme employer
    • granting of security on a debt to give it priority over debt to the scheme
  • Declaration of Intent that must be sent to trustees and TPR upon corporate events above – and on relinquishing control.

Introduction of authorisation regime for consolidators

Consolidators (superfunds) are occupational schemes set up to accept transfers of DB scheme assets and liabilities. In a superfund members’ security comes from capital buffer provided by superfund and it’s shareholders and possibly cash injections from employers whose schemes are entering the superfund not ongoing contributions from a sponsoring employer. The DWP is consulting on authorisation regime. In the meantime TPR expects co-operation from new superfunds and clearance applications from employers transferring schemes.

Changes to the funding framework

Changes to the funding framework will be delivered through a revised code of practice, the introduction of a DB chairs statement and some limited changes to existing scheme funding powers. TPR is currently working with industry experts on developing key principles to underpin a revised code which we hope to consult on more widely in Spring.

Draft principles currently include

Aspect of the Framework Principle
Long-Term Objective (LTO) Scheme to have a long-term funding objective which is clear, measurable and time-based.
Journey plan / Technical Provisions (TPs)

TPs should reflect the long-term funding objective and the level of all risks over time (explicit link between LTO and TPs).

Schemes should plan for the level of scheme-based risks to member benefits to decrease over time, with the appropriate level being linked to scheme maturity.

Risk taking and reliance on covenant Schemes with stronger employer covenants can afford to take more risk and so assume higher investment returns. However, full reliance on covenant strength should be time limited to the period over which there is good covenant visibility.
Risk taking: Reliance on contingent security Schemes can account for contingent security in their asset base but under strict criteria (appropriately valued, realisable).
Recovery Plan: reliance on covenant Schemes should be fully funded on their technical provisions, and deficits should be recovered as soon as possible based on affordability.
Compliance Trustees may explain why they are 'not compliant' for all aspects of the framework.

Timetable

Developing and introducing these revised regulatory frameworks is a long-term endeavour. DWP has already held consultations on TPR powers and authorisation regimes for CDC and consolidators (open to 16 January 2019 and 1 February 2019 respectively). The first key milestone for a revised funding code is a consultation in Spring next year on options for a clearer framework. We then plan a second consultation on the code itself in the Autumn.

In parallel to this, the Government said they would legislate as soon as the parliamentary timetable allows – this could mean a bill being introduced as early as June 2019, but it is as yet there is no concrete promise of a bill.

In the meantime TPR is already making steps to engage with schemes in ways which are clearer, quicker – and where necessary – tougher. The aim of changing how we intervene is both to broadening our reach and target schemes that are less likely to be meeting the standards we expect.

In practice we are doing this through:

  • One-to-one supervision of largest, riskiest schemes.
  • Sending tailored letters to small schemes with up-coming valuations.
  • Contacting schemes where there appears to be affordability (dividends versus DRCs) but funding plans may not be ambitious enough.

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