ACA raises 'significant concerns' over new DB funding proposals

The Association of Consulting Actuaries (ACA) has "significant concerns" that the new proposed defined benefit (DB) scheme funding rules drafted by the Department for Work and Pensions (DWP) are insufficiently flexible to be of benefit to many DB pension plans.

The proposed legislation, floated in July and supported by a revised DB Funding Code of Practice, is meant to provide clearer funding standards to support trustees and employers in planning their scheme funding over the longer term.

It is also designed to enable The Pensions Regulator (TPR) to intervene more effectively to protect members when needed.

It will require DB schemes to review and, if necessary, revise their scheme funding and investment strategies, with the purpose of ensuring that pension and other benefits under the scheme can be paid over the long term.

It will also require them to prepare a written statement of strategy, reporting progress against their determined targets and send a copy of the statement to TPR.

However, in a letter of response to the DWP, the ACA says that the legislation only permits limited variation in how schemes plan their journeys and so contradicts TPR's 2020 consultation on a revised Code of Practice.

It says that the standardisation that would emerge from the legislation has potential unintended consequences, such as increasing systemic risks in future by encouraging all DB schemes to invest in very similar ways.

"The financial market developments over the last few weeks bring these systemic risks into sharp focus," it warned.

"The costs that would flow from this reduction in flexibility have not been properly considered, making it difficult to assess the full financial consequences for employers."

In addition, the ACA has said that it is not clear what the requirements are when a scheme reaches significant maturity and whether there will be any transitional arrangements for schemes that are significantly mature when the new regime is implemented. "The Regulations should allow flexibility for significantly mature schemes to recover deficits over a reasonable period," it said.

The ACA also stated that there should be a "carve-out" for open schemes. In this scenario, there should be more flexibility for schemes that are not expected to mature (due to ongoing accrual and material levels of new entrants) in how their funding and investment strategy is determined.

ACA chair, Steven Taylor, said that the organisation's response comes down to fears over the cost of the new legislation for schemes and their sponsoring employers.

"The draft regulations contain a very significant ‘stand-alone’ change to the provisions for recovery plans, setting a primary principle that deficits should be recovered as soon as the employer can reasonably afford," he said.

“Although we agree reasonable affordability is a factor that should be taken into account when setting contributions, we do not agree that it should be given primacy over other factors by writing this into legislation.

"This is a significant change from the current code of practice requirements, which will potentially impose large additional costs on employers even if there were no other changes, conflicting with the government’s growth agenda.

“It may also have unintended consequences for corporate borrowing. The financial impact would be exacerbated if such contributions were required even where modest expected returns were likely to clear a prudently assessed deficit."

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