TPR DB funding code must maintain flexibility whilst avoiding fast track default - ACA

The Pension Regulator’s (TPR’s) new defined benefit (DB) funding regime must maintain flexibility without tying all schemes to fast track by default, the Association of Consulting Actuaries (ACA) has said.

The ACA stated that whilst it is generally supportive of the proposals outlined in the ongoing consultation, there are key details that are yet to be defined that are likely to be the difference between the success or limitations of the new regime.

In particular, the association argued that it is important for the fast track approach not to be seen as the default option, emphasising that the bespoke route must offer a genuine and viable alternative for pension schemes.

The ACA called for more detail on how using the flexibility provided under the bespoke option will be regulated to provide assurance that the new regime will not be too restrictive, emphasising that maintaining flexibility is “vital” to support sustainable growth for the employer, especially amid Covid-19.

It also expressed concerns over pressure for fast track equivalence, with the risk that TPR’s s231 powers come into play if TPR considers the divergence from fast track too significant.

Instead, the association argued that funding solutions imposed by TPR should be based on a scheme’s circumstances and not default to be in line with fast track.

ACA’s Pension Schemes Committee chair, Peter Williams, stated: “The ACA supports TPR’s twin track proposals. But we need to see details on how the ‘bespoke’ option will work in practice to be confident in the new regime.

“It is important that the current scheme specific funding flexibility is maintained, as this must be balanced with the needs of supporting the sustainable growth of UK employers.

“The ACA supports TPR’s proposal to introduce a ‘fast Ttack’ option and that TPR uses ‘fast track’ as the yardstick for accessing its powers under s231.

“But this must not mean that TPR compels schemes using ‘bespoke’ to fund to ‘fast track equivalence’ by default. ‘Bespoke’ must remain as a genuinely scheme specific alternative.”

This follows a recent survey by the Society of Pension Professionals, which revealed that just 7 per cent of pension professionals felt that the regime offered 'true flexibility'.

Furthermore, Lane Clark and Peacock (LCP) previously called for greater flexibility from the code, after arguing that the current proposals could risk being “too rigid” and having a damaging impact on both scheme members and employers alike.

The ACA also outlined support for a simple fast track compliance approach based on covenant and maturity, and a fit for purpose stress test.

However, it added that the precise framework of the fast track will be important to ensure the system works appropriately, especially amid the pandemic.

It also argued that whilst covenant visibility can reasonably inform recovery plan length and prevailing investment risk, what happens to the covenant beyond the visible period should be based on the balance of likelihood, rather than assuming low or nil covenant beyond this point.

Other concerns highlighted included the lack of an allowance for post-valuation experience within the fast track framework, which was highlighted as a useful tool that should be maintained.

The ACA has called on TPR to undertake an annual review of the fast track terms and triennial or quinquennial review of the framework, as well as to provide greater detail around demonstrating good trustee governance in any future consultations.

Considering the impact of the ongoing pandemic, the association has supported setting fast track parameters towards the more flexible end of ranges suggested within the consultation.

It also urged the regulator to avoid responding to the pandemic by requiring trustees to obtain legally binding contingencies that cover all risks that schemes run, arguing instead for a more balanced approach with favours employers’ growth, or in cases, survival.

ACA chair, Patrick Bloomfield, added: “The ACA supports Guy Opperman’s statement to the House of Commons on 27 April, that the 'best possible protection for members of DB schemes is a strong profitable employer'.

“DB scheme funding is very different to minimum risk/insurance funding and must be designed to balance sustainable growth of employers.

“We would not like to see a new regime that unreasonably pushes up DB costs. Doing so would exacerbate issues of intergenerational fairness, by diverting a greater share of employers’ pensions spending to making DB promises more secure, at the expense of DC saving for current employees.

He concluded: “TPR and the government must be mindful that the new funding code has to balance commercial risks fairly, both across generations and between those with and without DB savings within each generation.”

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