The Society of Pension Professionals (SPP) has highlighted concerns around the “unnecessary” compliance burden on schemes proposed by The Pensions Regulator’s (TPR) draft Defined Benefit (DB) Funding Code and called for the code to be simplified.

In its review of the draft Funding Code, the SPP reached several conclusions of the impact the current draft would have, such as actuaries needing to consider whether the schemes meet the fast-track tests, which is a new concept designed to help TPR focus its resources.

The SPP also concluded that the proposals would force all schemes to carry out detailed integrated risk management strategy planning at each valuation, regardless of their circumstances.

Schemes would be required to reach agreement on a journey plan with the employer, to include the documentation of various details relating to covenant metrics and investment strategy – both now and many years into the future, the SPP concluded.

The society stated that the extra work that would come as a result of the draft funding code will “inevitably” mean an increase in costs for schemes.

In particular, the SPP pointed out that getting external covenant advice will become a necessity in most cases, and schemes will also incur additional actuarial and investment advisor costs at future valuations.

SPP president, Steve Hitchiner, commented: “The original intention of the new funding regime was to address a small number of cases where risks were not being appropriately managed, but these proposals are over the top in a world where surpluses are more common than deficits, and schemes are approaching the insurance market in record numbers.

“Much of TPR’s thinking is sound risk management, and helpful guidance, but its proportionality for all schemes is questionable.

“TPR’s own analysis shows 51 per cent of schemes will pass their fast track tests without any change – and so are considered low risk by TPR. This increases to almost 60 per cent if we exclude those that fail because of the length of their deficit recovery plan, which will normally be due to reasonable affordability constraints.

"Many more will be close enough that they can meet the tests with a few minor strategy adjustments. Nevertheless, all these schemes appear to be subject to largely the same compliance burden, pushing trustees towards box-ticking rather than thinking through the underlying risks of their specific circumstances.

“TPR should consider how the code can be simplified to target those schemes posing greater risk, without placing an additional compliance burden on the majority who are already well funded with low risk strategies.”

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