Industry warns against 'unnecessarily restrictive' DB funding regulations

Industry experts have raised concerns over the "unnecessarily restrictive" draft defined benefit (DB) funding regulations, warning that the new funding rules could make matters worse for many pension schemes and their members.

Although the industry welcomed the government's intent to strengthen the funding regime and protect the long-term security of member benefits, concerns have been raised over the prestrictive nature of the draft regulations.

The Association of Professional Pension Trustees (APPT), for instance, argued that flexibility within the funding regime will be extremely important for ensuring that each scheme takes appropriate steps to meet their long-term objectives.

In particular, the APPT raised concerns around the weakening of trustee powers in relation to the funding and investment strategy that, under the draft regulations, would require the employer’s formal agreement as well.

Schemes could also face increased costs and administrative burdens as a result of the new regulations, according to APPT, which it warned could place a strain on trustee and employer relationships at a time of economic uncertainty.

APPT chair, Harus Rai, commented: “Further guidance for trustees would be welcome as the regulations are implemented.

"For example, recent market events in the gilt markets have highlighted the importance of maintaining liquid assets but it has become difficult for trustees to forecast such events."

The Employer Covenant Practitioners Association (ECPA) also suggested that the regulations are "overly prescriptive" in some areas, warning that this could bring unintended consequences that could affect the UK economy and business investment.

In particular, the ECPA warned that the regulations, as currently drafted, could encourage a narrow view of covenant, an over-focus on short term cash demands from sponsoring employers, and drive a narrow view that does not give sufficient flexibility with respect to scheme specific issues, for example open schemes.

The Society of Pension Professionals (SPP) echoed these concerns, stating that while the Department for Work and Pensions (DWP) is rightly concerned that a minority of schemes are pushing the flexibilities in the existing regime too far, the draft regulations could risk making matters worse.

“We worry that the draft regulations are unnecessarily restrictive, and in trying to weed out the bad behaviour of a minority, they will make matters worse for many other schemes and their members,” SPP DB committee members, Jon Forsyth and Chris Ramsey, stated,

"Recent market movements including seismic shifts in gilt yields have shown the importance of a funding regime that is flexible, and we are concerned these regulations are a shift away from this and will have negative unintended consequences for many schemes and sponsors.

“On a related point, there is a risk that the direction of travel within the draft regulations is to force schemes to consider risk and mitigation in a very narrow fashion. And, as the past few weeks have demonstrated relating to liability driven investment (LDI), this can create its own systemic risks.”

More broadly, the SPP raised concerns that respondents are being asked to comment on the regulations without sight of the code itself or of a detailed impact assessment, arguing that this makes it extremely difficult to understand how what has been proposed will work in practice and what the implications for schemes and sponsors will be.

This was echoed by Sackers partner, Janet Brown, who stressed that the draft regulations are "only half the story", describing the regulations and the code as a "crucial double-act".

"As things stand, a number of key elements will be determined in the revised DB funding code which has not yet been issued by The Pensions Regulator (TPR), such as what amounts to 'significant maturity'", she continued.

"Like Torvill and Dean, the draft regulations and the code will form a crucial double-act, so it is hard to envisage how one will work without the benefit of having seen the two together and how they support and interact with each other.”

“We hope that the government will allow the industry further opportunity to comment on the draft regulations once TPR publishes the draft code for consultation.”

ECPA chair, Karina Brookes added: “It is difficult to respond fully to the questions raised in the consultation without seeing the detailed code and covenant guidance - noting the references and balance between statutory regulations and a ‘comply or explain’ Code of Practice.”

TPR is expected to publish a consultation on the DB funding code “this side of Christmas”, having recently confirmed that it was planning to review the use of duration as a measure of maturity in the DB funding code after recent market volatility.

Despite industry concerns, TPR also confirmed that it would be making an allowance for open schemes in the supporting code, to allow open schemes to take account of the fact that they are building up future accrual when measuring maturity.

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