DB scheme sponsors 'under pressure' to pay more into schemes under new funding requirements

New funding requirements for defined benefit (DB) schemes included in the Pension Schemes Act are likely to mean sponsors will face pressure to pay more money into their schemes more quickly, according to Herbert Smith Freehills.

A blog post from the law firm noted that the legally binding long-term funding and investment targets that trustees of DB schemes will have to agree with the scheme’s sponsor will likely require short-term funding targets to increase over time.

There is no specific date set out by the act for when schemes will need to have achieved their targets by, but Herbert Smith Freehills noted that The Pensions Regulator (TPR) had previously indicated that “it expects schemes to hit their long-term target by the time they are 'significantly mature', which it considers to be when they reach peak cash flow”.

Additionally, it was noted that TPR’s new DB funding code is expected to say that DB schemes’ technical provisions should increase over time to ensure long term-targets are met, which the law firm stated marked “a significant shift in the statutory funding regime”, which “could lead to a significant increase in deficit repair contributions for some sponsors”.

The code is expected to be published for consultation in the second half of the year, with its requirements projected to be imposed on schemes from spring 2022 at the earliest.

In January, The Pensions Regulator (TPR) said it had received “general support” in its interim response to its first DB funding code consultation, although some concerns were raised about proposed twin track routes.

Although the code is not expected to come into force for some time, the blog post recommended that trustees and sponsors going through the valuation process this year should “have regard to it”.

The blog concluded: “The new statutory funding requirements will fundamentally change the way the scheme funding process works. Going forwards, trustees and sponsors will need to agree a legally-binding long-term objective for their scheme and work backwards to put in place a funding plan enabling this target to be achieved.

“Rather than simply going through the normal three-yearly valuation cycle, there will be much more focus from the regulator on ensuring that schemes are on track to hit their long-term objective.

“The regulator’s interim response to the first consultation on its new funding code suggests that it recognises the concerns that have been raised and the challenges facing many schemes and sponsors as a result of the current economic environment.

“However, we must wait for the second part of its consultation to see how far the regulator will modify its proposed approach to address those concerns and to mitigate the impact on struggling DB sponsors. We should discover the answer to this during the course of this year.”

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