Industry welcomes TPR's DB funding code response; concerns raised over lack of detail

The pensions industry has reacted positively to The Pensions Regulator’s (TPR) defined benefit (DB) funding code consultation response but raised concerns over a lack of detail.

TPR said on Thursday that it had received “general support” to its first DB funding code consultation in its interim response, although the regulator acknowledged that some concerns had been raised about proposed twin track routes.

Hymans Robertson partner, Laura McLaren, said it was encouraging that TPR “will address calls for more detail on what will be acceptable under the bespoke track and the supporting evidence needed”, adding that she hoped “this will address widespread concerns around the potential overreach of the fast track regulatory approach”.

PLSA head of DB, local government pension schemes and investment, Tiffany Tsang, said: “We are glad that the regulator is listening, as the industry has raised some fundamental concerns about the impact of many of the proposals put forward last year including being too prescriptive in a number of key areas, the lack of clarity and interaction between the bespoke and fast-track approaches and the need for the differing circumstances of open schemes and closed schemes to be more fully recognised.”

However, Tsang added that it was disappointing that the response “does not clarify further – at this time – some of the misunderstandings the report notes have been made about the proposals”.

Other parts of the industry also expressed concern about the lack of detail, with Barnett Waddingham head of pensions research, Tyron Potts, commenting that the “light” level of information on the regulator’s expected direction of travel offered the industry “little more to go on”.

McLaren also noted that the response “doesn’t offer much in terms of specifics” but acknowledged that “those will come in the second consultation” in the second half of 2021.

She continued: “Although TPR indicates it will continue to communicate over that period, given the lengthy build up, some may have hoped for this sooner rather than later.

“Certainly, pension schemes which are due valuations this year will have the challenge of navigating this ongoing regulatory uncertainty. Any further delays to timings may run the risk of stifling decisive action from trustees and sponsors in the meantime.”

Aon partner and head of UK retirement policy, Matthew Arends, raised the concern that the interim response “has not called out one of our key concerns with the first consultation - the additional costs on UK plc arising from TPR’s intended approach to long-term targets".

He continued: “This arises because TPR expects all schemes (whether they adopt fast track or bespoke compliance) to reach their long-term target by a fixed date – which will depend on each scheme’s maturity.

“The consequence of this is that the scheme sponsor will need to make extra contributions if investment underperformance occurs. That will be the only way they have available to get back on track for the target date - and it represents a commitment most sponsors do not currently have.”

"Corporate cashflows are finite, so additional cash to meet long-term pension targets means less available to spend on employees and investment in the business.

"Conceivably, this might mean less is available for defined contribution savings for employees, as a result of having to support a fixed long-term target date for DB pensions. Is that inter-generationally responsible?”

Arends also noted that it was “tough news for many” that TPR had not recognised the extra financial commitment it was expecting companies to make given the fact that it remains “a very challenging time” and economic conditions may worsen.

McLaren argued that there had been a growing sense that, due to the challenging conditions brought on by Brexit and the pandemic, the final fast-track parameters “would need to be set more flexibly so fast track remains an achievable target for most schemes, at least in the short term”.

PwC global head of pensions, Raj Mody, also acknowledged this problem and stated: “There will always be some kind of disruption. Any new regulatory funding regime will have to be able to withstand future turbulence; it's not just about the issues which have surfaced in 2020 and 2021.”

Looking at the project overall, Mody commented: “While in principle a twin-track regime of fast track and bespoke sounds right, it will be crucially important to set the boundaries and flexibilities of fast track appropriately. It's in no-one's interests to have a situation where too many schemes have to go down the bespoke route.

“That would add an overhead to the industry which already has enough regulation on its plate. It would also add a workload to the regulator where its attention may be better directed at true problem areas and not pension schemes that are generally well-run and well-supported.”

Potts concluded: "We urge the regulator to ensure that the economic lessons of the ongoing pandemic are learned and reflected in the new code. We therefore look forward to continuing our dialogue with TPR as part of the next consultation later this year in order that a robust, flexible and fit-for-purpose regime results."

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