However, we have significant concerns that the proposed legislation is insufficiently flexible and reduces the ‘scheme specific’ element of the current funding regime – replacing it with an industry standard approach, only permitting limited variation in how schemes plan their journeys and set their ultimate destination. Based on these regulations, it would not be possible for the ‘bespoke’ option outlined in the Pension Regulator’s 2020 consultation on a revised Code of Practice to be as flexible as we had hoped, and all schemes will be required to adopt fairly similar plans.
This standardisation also has potential unintended consequences, such as increasing systemic risks in future by encouraging all DB schemes to invest in very similar ways. The financial market developments over the last few weeks bring these systemic risks into sharp focus.
In addition, the costs that would flow from this reduction in flexibility have not been properly considered, making it difficult to assess the full financial consequences for employers.
Commenting on the response, ACA Chair, Steven Taylor says: “The draft regulations contain a very significant ‘stand-alone’ change to the provisions for recovery plans, setting a primary principle that deficits should be recovered as soon as the employer can reasonably afford.
“Although we agree reasonable affordability is a factor that should be taken into account when setting contributions, we do not agree that it should be given primacy over other factors by writing this into legislation. This is a significant change from the current Code of Practice requirements, which will potentially impose large additional costs on employers even if there were no other changes, conflicting with the Government’s growth agenda.
“It may also have unintended consequences for corporate borrowing. The financial impact would be exacerbated if such contributions were required even where modest expected returns were likely to clear a prudently assessed deficit.
“Given recent financial market developments we also believe the opportunity should now be taken to reflect on the broad dynamics laid out in the draft regulations that drive schemes towards very cautious investment approaches as they mature to ensure these will not contribute to increased systemic risks when viewed across the whole industry”.
The ACA also comments that:
A well governed, mature, pension scheme will want to set a journey plan with a clear end date for reaching low dependency that does not change significantly, simply because of changes in gilt yields.
On low dependency asset allocation, the Regulations will unnecessarily restrict flexibility, investment efficiency and innovation. The higher-level principle of ‘employer contributions not being expected’ should be sufficient for the regulations.
We support significantly mature schemes being able to invest in appropriate levels of growth and return seeking assets (like infrastructure), where this is justified by the strength of the employer covenant and/or contingent assets and where short to medium term liquidity requirements are properly managed. The legislation should be flexible enough to allow this, maintaining an important element of scheme specific funding.
As drafted, it is not clear what the requirements are when a scheme reaches significant maturity and whether there will be any transitional arrangements for schemes that are significantly mature when the new regime is implemented. The Regulations should allow flexibility for significantly mature schemes to recover deficits (whether resulting from the implementation of the new regime or emerging in future) over a reasonable period.
There should be a carve-out for open schemes. Where a scheme is not maturing or is not expected to reach significant maturity in the foreseeable future, these new governance requirements are in our view disproportionate. As a minimum, there should be more flexibility for schemes which are not expected to mature (due to ongoing accrual and material levels of new entrants) in how their funding and investment strategy is determined.
A significant point that has not been addressed is how the requirement for the funding and investment strategy to be agreed with the scheme’s employer will apply when a scheme is significantly mature – this would appear to introduce an employer veto over high level investment strategy for significantly mature schemes and, unless changes are made to Schedule 1, prior to significant maturity.
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