Pensions industry welcomes 'major' milestone for DB funding code

Industry experts have hailed the publication of new funding regulations for defined benefit (DB) pension schemes as a “major milestone” on the journey to a new funding regime, although further details are still awaited from the regulator.

The government yesterday (26 July) launched a consultation on the draft DB funding regulations, which will require DB schemes to have long-term plans set out in a funding and investment strategy, and to submit these plans to The Pensions Regulator (TPR).

Industry organisations have welcomed the news, with Pensions Management Institute (PMI) director of policy and external affairs, Tim Middleton, suggesting that the standards will bring "greater clarity" for trustees and improve security for members.

“There are 10 million people with benefits retained in DB pension schemes, and it is as important as ever to ensure that funding regulations ensure that trustees do everything possible to protect members’ pensions," he stated.

"Trustees are better now able to give greater focus to long-term planning and to manage risks more effectively. This is a welcome development that will give greater confidence to members about the management of DB schemes.”

LCP partner, Jonathan Camfield, also highlighted the regulations as a "welcome milestone in the long and winding road towards a new framework for the funding of DB pension schemes".

In particular, Camfield praised the fact that consideration had been given to the broader changes that have been seen in the world since the ideas were first proposed, clarifying however, that the industry is "still some way from a final product".

He explained: "Once these regulations have been finalised, the way will then be clear for TPR to publish its second funding code consultation which will show in detail the extent to which government and regulators have listened to industry concerns about the potential rigidity of what was proposed.

"Trustees and sponsors should already be preparing for this new world, with a particular focus on long-term journey planning and a deep understanding of the strength of the ‘covenant’ of the sponsoring employer. Nonetheless, today represents an important step forward”.

Adding to this, Broadstone technical director, David Brooks, noted that the DWP will be "leaving a good proportion of the detail to TPR who have promised to consult on their code in the autumn", suggesting that "it is here that the devilish detail may yet emerge”.

“The question remaining for trustees and sponsors is whether this funnels schemes too fast and too hard by removing the upside opportunities of holding growth assets for longer," he continued, suggesting that the Pensions Minister has been "at pains to point out that this isn’t a one size fits all approach".

These concerns were shared by Isio partner, Mike Smedley, who warned that the drafting is "surprisingly prescriptive and could be a bit of a straight-jacket for trustees".

He stated: "Schemes are expected to follow a gradual de-risking approach towards a low risk ‘highly resilient’ and ‘broadly cashflow matched’ investment strategy, with deadlines determined by TPR.

"Whilst this might be right for many schemes, it doesn’t allow for much flexibility and it’s not clear what happens in a world where things don’t always go to plan. It’s also the furthest that government has ever gone in dictating to pension trustees how their assets should be invested.

“There will be lots of work for trustees and their advisers to map out their future strategy in the detail required. But the biggest shock is reserved for companies with the proposal to hard-code in legislation that deficits ‘must be recovered as soon as the employer can reasonably afford’.

"This doesn’t offer much scope for compromise and may drive a wedge between trustees and sponsors at a time when they are increasingly working closely together.”

Dalriada Trustees professional trustee, Vassos Vassou, also raised concerns that the new requirements could require additional resource and place further responsibility on "stretched trustee boards".

"Trustees will need to become very familiar with the new requirements and understand how they should be applied to their own scheme," he explained.

"This includes developing an entirely new skill in being able to assess whether the funding and investment strategy is being successfully implemented in a new requirement call the "Statement of Strategy", which is signed off by the chair of trustees.

"For schemes without a chair, a chair will need to be appointed and schemes will need to consider how to meet this requirement. In a sense Chair Statements, which DC schemes have been producing for many years, are now being introduced for DB plans."

"All this will require additional resource and, overall, the regulations will continue to heap more responsibility on stretched trustee boards which are already trying to cope with other major projects such as pensions dashboard and GMP equalisation.”

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