David Fairs, executive director of policy, analysis and advice at The Pensions Regulator (TPR) outlines the incentives behind the move to update the DB funding code.
We recently published our interim response to our revised defined benefit (DB) funding code consultation.
The consultation aims to scope out what the revised code may look like under the new developing legislation. It asked for views on several proposals including The Pensions Regulator’s proposed regulatory approach (twin track routes to demonstrating compliance: Fast Track and Bespoke), the principles that should underpin all valuations in the revised framework and ideas on how these principles could be applied in practice to provide clearer guidelines.
There were 127 responses to the consultation across a broad range of stakeholders, generating 6,000 comments in total. This first part of the consultation was complex and we are grateful for the well thought through responses which gave light to a number of issues to be considered.
One thing which has come through in much of the commentary and responses is support for the idea that maturing schemes should be on a pathway to limiting the risk they are taking when they become very mature.
As the Pension Schemes Bill and our consultation set out, as schemes mature their ability to deal with volatile and poor investment outcomes is limited and the impacts this could have on the sponsor could be significant.
There is consensus that it makes sense for trustees to plan to reach a position of higher resilience to risk and less reliance on the employer when their scheme is very mature. Indeed, this is what many schemes are doing. T
his is not new: it is good risk management. But we need to be able to address the challenges posed by trustees not thinking about this properly. Our key focus is on those schemes carrying more risk than their covenant can reasonably support and who are not considering that they do not have time for their investments to repair any damage.
This is a problem for them, their members, their employer and for the Pension Protection Fund. We think it is right to address this problem as part of giving clear guidance to the market as whole. I doubt many would argue against this.
Our revised code of practice has to be consistent with new legislation set out in the Pension Schemes Bill and the consultation and development of DWP’s regulations, currently expected to be in the first part of this year. We therefore anticipate publishing our second consultation in the second half of 2021.
The second funding code consultation in the second half of 2021 will include:
– A full summary of the responses to our first consultation and the approach we have taken in light of these responses and the final legislative package
– The draft code of practice for consultation and our proposed regulatory approach, including developing thinking around:
– our process to review and update Fast Track guidelines
– our approach to assessing valuations
– engagement with DB schemes
– An impact assessment and supporting analysis