New TPR funding code could see DB pensions ‘become a thing of the past’

The pensions industry has said that the proposed overhaul of The Pensions Regulator’s (TPR) defined benefit (DB) funding code could have “significant implications” for schemes.

The regulator issued a consultation today (3 March), seeking industry views on changes to the code to better manage risks on long-term scheme funding and investment strategy planning.

Hymans Robertson head of DB, Susan McIlvogue, said that although the new regime was “welcome”, there are some “significant implications that will have an impact on the DB universe”.

She continued: “Remaining open schemes will be hit particularly hard, with the same requirements applying to open schemes as closed schemes. This could force further DB closures by the back door, by pushing up future service contribution rates.

“Put simply, it could push up costs so high that DB pensions become a thing of the past.”

LCP senior partner, Bob Scott, agreed that the code represented a “huge shake-up” that could “easily lead to a wave of closures” and showed that TPR “is going to be taking a tougher line on DB funding”.

His LCP colleague, partner Jonathan Camfield, added: “Some employers are likely to see a significant increase in the amount they have to contribute to their pension scheme, and the combined bill for UK plc is likely to run into billions of pounds.”

Aon partner, Paul McGlone, noted that it was “surprising” that the consultation proposes “such fundamental change”, as the 2018 White Paper said that the funding regime “works well on the whole”.

Trustees will also have to adapt to the proposed DB funding code as it adds complexity to their role, warned Dalriada Trustees professional trustee, Vassos Vassou.

He commented: “An important consideration from the proposed defined benefit funding code will be the additional complication introduced by the fast-track and bespoke approaches with the schemes’ long-term objectives layered on top.

“These are complicated issues which means trustees’ knowledge and understanding levels will need to ratchet up again so that they can comply with the new requirements. Either that, or trustees may need to rely on advisors more to help them through the process.”

Despite the concerns, many in the industry welcomed the consultation and its proposals.
Aegon pensions director, Steven Cameron, described it as “prudent” for TPR to be reviewing investment and funding approaches as schemes mature.

“Members who have deferred benefits in such schemes will want to be assured that their benefit entitlements remain properly funded as an increasing proportion of members move past retirement date or after having sought advice, transfer out to a defined contribution arrangement,” he added.

Whether the proposals are a positive for the industry and members remains unclear at this juncture, and PLSA head of DB, LGPS and standards, Joe Dabrowski, concluded that the code will “shape conversations at both corporate and trustee boards for some time”.

He continued: “TPR has clearly done a lot of thinking around the eight very sensible guiding principles but there’s usually devil in the detail that will need careful consideration.

“This includes the new funding assumptions, assessment and changes proposed to schemes’ ability to benefit from a strong employer covenant. It will also affect schemes’ thinking around long-term strategies – and whether to run on, consolidate or buyout.

“How the new framework maintains one of the major strengths of the existing code – it’s flexibility to reflect schemes varying needs and circumstances – is also a key area for examination.”

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