Laura McLaren, Partner, Hymans Robertson says: "Today’s long-awaited consultation launched by the DWP into regulations underpinning the new defined benefit funding code is an important step forward. After numerous delays, notably it is expected to pave the way for the Pensions Regulator to launch its second consultation into the Code of Practice later this year. That keeps plans on track – at least for now – for the Code to launch in late 2023.
“Following Royal Assent on the Pension Schemes Act 2021, this ‘secondary’ legislation starts to flesh out more on the new rules and establishes where the Regulator will be able to step in if a scheme is falling short of the legal requirements. However, the draft regulations don’t offer a great deal more in terms of specifics than had previously been signposted in consultation to date. Largely sticking to pinning down the key principles, there isn’t anything in the draft legislation about Fast Track and Bespoke arrangements, and nothing confirming the specific Fast Track parameters. All of that is left for the Code of Practice.
“The Pensions Regulator has announced it will be launching the draft Code of Practice in the Autumn after seeing DWP’s draft regulations. Given the draft regulations and tone of the Regulator’s responses to date, this looks unlikely to change fundamentally. There is some welcome reassurance that concerns raised by respondents are being addressed. In developing the draft Regulations, DWP note they have aimed to ensure they will not unduly constrain open schemes. The Regulator has also been keen to address widespread concerns around scheme specific flexibility in the Bespoke route.
“Given the developments since the first consultation was published, most will be watching to see where the final Fast Track parameters are pinned down. The draft regulations confirm that the maturity of a scheme will be measured using a duration of liabilities but, for now, leaves the point at which a scheme is deemed ‘significantly mature’ to be defined by the Code. Similarly, the regulations include a principle that funding deficits should be recovered as soon as the sponsoring employer can reasonably afford, but stop short of defining any more clearly what is appropriate in the context of a recovery plan length or structure. Definitions of a ‘low dependency’ investment allocation and funding basis stick to principles rather than putting figures to these.
“Whilst DWP and TPR take time to get the changes right, trustees and sponsors will continue to need to prepare funding valuations knowing that new rules are coming down the line. However, as the final details start to be pinned down, these should help those agreeing funding plans in 2022 and 2023 better understand how they are likely to work with the new code coming in 2025 / 2026.”
Tim Middleton, Director of Policy and External Affairs at the Pensions Management Institute, comments: “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 These new standards bring greater clarity to trustees as to what is expected of them and also improve security for members. 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.”
David Brooks, Technical Director at pensions consultancy Broadstone, said: “We finally have the regulations to back up the requirement for schemes to prepare a Funding and Investment Strategy with their actuarial valuation. We have long lived with the concept of this statement and so it all feels oddly familiar.
“The detail of the consultation covers much of what we already knew or surmised. Schemes will need to set a date from which the risk to members’ benefits is at a minimum. In general, investment risk is curtailed and it is re-emphasised that sponsor covenant must be monitored and understood.
“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. The Pensions Minister is at pains to point out that this isn’t a one size fits all approach.
“However, the DWP will be leaving a good proportion of the detail to The Pensions Regulator who have promised to consult on their code in the Autumn. It is here that the devilish detail may yet emerge.”
Emily Goodridge, Managing Director, Cardano Advisory, comments: “Covenant is the ultimate underpin of scheme risks and we welcome the inclusion of covenant in the draft Regulations. The definition reflects its complexity and the blend of qualitative and quantitative elements that need to be considered as well as the important interaction between covenant and the funding and investment strategy.
“Covenant assessment is not just about a rating; it is about managing key risks to ensure members get their promised benefits and to minimise additional pressure on sponsors in downside scenarios.”
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