DB funding proposals will improve clarity for trustees - TPR

The twin-track approach included in proposed changes to the defined benefit (DB) funding code should provide greater clarity for trustees and employers, according to The Pensions Regulator (TPR).

TPR executive director of regulatory policy, analysis and advice, David Fairs, explained more about the proposed twin-track route to DB funding compliance, which involves separating schemes into bespoke and fast track approaches, in a blog post.

Fairs commented that the fast track route would see schemes complying to “clear guidelines around what we think is an appropriate scheme funding approach”, adding that the bespoke route is what most schemes are currently dealing with as they are assessed on a case-by-case basis.

However, Fairs noted that TPR was “not making efficient use of our regulatory resources” as it had not amply explained what good looked like in terms of funding compliance.

As such, the bespoke route is intended to bring clarity for schemes and objectivity to assessing compliance with legislation, with trustees who head down the bespoke route essentially needing to explain how or why their arrangement deviates from fast track and how any additional risk has been managed.

The post comes as the first consultation into changes to the DB funding code nears its 2 September close, having been launched in March.

Moving on from the new funding compliance approaches, Fairs also commented that he believed “members’ accrued benefits should be protected to the same level in both open and closed schemes” as he detailed proposals to align accrued benefit funding strategies for both open and closed schemes.

Fairs said: “We know the best support for a DB pension scheme is a strong employer. So we’re keen to ensure the new funding framework doesn’t lead to unnecessary scheme closures by unduly increasing the cost of running the scheme.

“However, for funding purposes, it is important to distinguish between past (accrued) and future benefits.”

His TPR blog post also explained that open schemes should have the same long-term objectives as closed schemes, that objective being low dependency funding by the time the scheme has become significantly mature.

Fairs did note that open schemes “tend to be less mature than closed schemes” and so accepted that it would take them longer to become significantly mature and reach their long-term objective, with some open schemes with a strong flow of new entrants likely to never mature.

However, the TPR director said this would leave these schemes with “more flexibility over their funding and investment strategies in the meantime”.

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