PLSA AC 22: TPR to review duration as a measure of maturity in DB funding code

The Pensions Regulator (TPR) is planning to review the use of duration as a measure of maturity in the defined benefit (DB) funding code, after recent market volatility highlighted an “interesting dynamic” in this approach.

Speaking at the Pensions and Lifetime Savings Association (PLSA) Annual Conference 2022, TPR executive director of regulatory policy, analysis and advice, David Fairs, confirmed that TPR will be launching a consultation on the DB funding code “this side of Christmas”.

However, some changes may be needed, as Fairs confirmed that the regulator is reviewing its initial plan to use duration as a measure of maturity, after recent market volatility raised concerns over this approach.

Fairs explained: “Duration is linked to interest rates, so if interest rates move by a sizeable amount over a short period of time that will change duration, so that's obviously something that we're going to have to reflect on.

“It's interesting as although duration has changed, actually what we've seen over the past few days is funding levels have improved for the vast majority pension schemes, and in some cases they've improved quite significantly.

“So you have a somewhat interesting dynamic in that high maturity might have gone closer, but actually the goal that you're aiming for might be less.”

In addition to this, Fairs confirmed that TPR would be including an allowance for open schemes, to allow open schemes to take account of the fact that they are building up future accrual when measuring maturity.

He explained: "That means that you can potentially allocate a greater amount of your assets to growth assets, and still pass the Fast Track stress test, for example.

"What we're trying to do is have a specific mechanism that recognises that open schemes may never progress to being mature schemes, they may be perpetually immature, and it would therefore be wrong to actually encourage them to de-risk."

Fairs also disagreed with suggestions that the DB funding code could contradict the government’s growth agenda, arguing that

However, PLSA policy board member, Ava Lau, raised concerns that the scheme could cause pension schemes to shift away from certain growth asset classes, instead shifting to more secure matching assets.

“Risk depends on how bold and brave the trustees will be and whether their advisers would go to the trustees and say look, even though the safer option is going be to go to gilts, there is an innovative strategy that you could adopt, that would lead you down the bespoke route," she stated.

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