Jon Forsyth, Partner at LCP said: “This long-awaited bumper set of documents is now helpfully putting some more workable detail on the future of DB funding and investment regulation, but it also highlights that the DWP's regulations now need to catch up with TPR’s thinking Just a few months ago, DWP published proposed rigid new rules which would have forced all schemes into a straitjacket, required many sponsoring employers to put more money into their pension schemes, and could have resulted in dozens of sponsoring employers being forced out of business.
By welcome contrast, TPR has come up with a more pragmatic package, allowing some schemes to continue to take investment risk for much longer where appropriate, and indicating that recovery plans of up to 6 years might be acceptable even if employers can afford to pay off deficits quicker than that. But this doesn’t fit with the draft regulations, and we’d urge TPR and DWP to work closely together over the coming months to ensure TPR’s more pragmatic approach is reflected in the final regulations.
Although there is some initial analysis of the potential behavioural impact of the new regime, neither TPR nor DWP has yet published a full assessment of what they think these new rules will mean for schemes, making it very hard to evaluate what has been proposed. For the DB pensions world to know where it really stands, TPR and DWP need to set out a coherent and co-ordinated set of proposals which fit together – we’re yet to see this.”
Tiffany Tsang, Head of DB, LGPS and Investment, PLSA, said: “We are pleased that the draft allows for the flexibility the PLSA called for in determining technical provisions for schemes open to new entrants. Overall, we support TPR’s move away from using Fast Track as a benchmark and that TPR has signalled clearly that many Bespoke valuation submissions will not result in detailed scrutiny or engagement. We note that recovery plans based on affordability will be a core focus for the regulator if schemes fall within Fast Track in all other ways.
“While we support ongoing dialogue between trustees and employers in developing funding and investment strategy, we remain concerned that the draft code shifts the fundamental ways in which strategy negotiations currently operate. The proposals may give disproportionate weight to employers’ preferences, which may not be aligned with trustees’ objectives, particularly in the current economic climate. We agree that the use of LDI should be wrapped into considerations of supportable risks that would naturally be laid out in journey plans; the drafted expectations around when and how to use LDI are reasonable.
“However, further assessment of the proposals is needed before drawing firm conclusions so we will work closely with our membership and TPR in the coming months to determine the on-the-ground impact of the detail that is now provided - on open schemes, for Bespoke approaches, and for multi-employer schemes in particular. The Code will also need to completely fill in the gaps that the draft scheme funding regulations left open for interpretation.”
Leah Evans, Pensions Board Chair at the Institute and Faculty of Actuaries, said: “The IFoA has been engaging for some time with the Department for Work and Pensions and the Pensions Regulator (TPR) on how the requirements of the 2021 Pension Schemes Act are translated into new regulations and a code of practice. One of the key concerns we had expressed was a risk that the updated regulations and funding guidance may become too narrow and prescriptive, which in turn could have significant unintended consequences in areas related to affordability, documentation burden and overall cost. We welcome TPR’s clear statement that a bespoke approach will remain an important cornerstone of the funding rules, with fast track a potentially more efficient regulatory approach for schemes where this is appropriate.
“We look forward to engaging with the consultation over the next 14 weeks and playing our part in shaping the final outcome to support a strong strategic framework for pension schemes going forward.”
Jane Evans, EY-Parthenon UK Pensions Strategy Partner, says: “Today’s announcement from TPR is important for schemes and sponsors as they plan long term and ensure the appropriate balance between member security and stability of sponsor’s financial obligations. The focus on longer-term covenant visibility is an appropriate pivot for maturing schemes, and this shift in focus will allow trustees to consider how much risk they can take over a longer-term time horizon. It also means that trustees can consider important factors in addition to short-term cashflow, such as sponsor exposure to ESG. In the current uncertain environment, stress testing will be key, and will help to outline areas of vulnerability that need to be monitored and possibly acted on.
“The industry will welcome the confirmation today from TPR that the Fast Track will be used as a filtering tool for regulatory oversight. It is important however that it remains flexible, even beyond the point of significant maturity, especially if the date of significant maturity can be impacted by volatile markets.”
Heidi Webster, XPS head of scheme funding, said: “TPR’s latest funding code consultation goes some way to providing reassurance to trustees and sponsors about the potentially prescriptive nature of the draft funding and investment strategy regulations proposed by DWP earlier this year. We hope that the regulations, once finalised, will reflect the level of flexibility included in this consultation.
There was a concern that the regulations, as drafted, would drive overly low risk investment strategies, which could ultimately lead to longer term dependency on sponsors. However, TPR has confirmed that it may be reasonable for schemes to hold some growth assets at and beyond significant maturity.
We remain concerned, however, about the large number of schemes that may already be at or past significant maturity, which as currently drafted is defined in the funding code as a duration of 12 years, in line with requirements set out by the draft regulations. Alternatives to the proposed duration approach are considered in TPR’s consultation. Trustees will need an approach which provides predictability for effective journey planning.
We welcome TPR’s proposed approach that Fast Track (now a filter for TPR’s assessment of actuarial valuations) sits outside of the funding code, which means Fast Track is less likely to become the “default” strategy.”
Mike Fenton, Principal and Senior Consulting Actuary at Buck comments: “The Pensions Regulator’s thinking has moved some distance in the last two years. The draft code and today’s consultation documents show that the Regulator has listened closely to what the industry said in response to the first consultation in 2020.
“The events of the past few months have shown the importance of flexibility, so we are pleased to see that Fast Track definitions will not be hardwired into the funding code but instead issued separately. It’s also positive to see that the Regulator has now clarified that once low dependency has been reached, investment strategies with significant proportions of growth assets are acceptable.
“It is, however, unfortunate that the draft funding code could not be published and consulted on at the same time as the DWP’s draft regulations, as the two need to work as a package. The DWP and the Regulator should be prepared to delay implementation beyond October 2023, if more time is needed to finalise a regulatory framework that the industry can have confidence in.”
David Hamilton, Chief Actuary at Broadstone commented “Whilst TPR does make reference to proportionality, except for a few specific items for very small schemes, it seems that this flexibility will only begin at a point when a significant amount of additional analysis and work has been undertaken. The cost burden (which also needs to be built in to valuations going forward) will be significant and as plans (and economic circumstances) evolve, it will be interesting to see how much of this additional planning delivers long term value.
“Those with schemes with less than 100 members will be relieved to see exemptions from some of the onerous areas but we would rather see such explicit flexibility set out within the full Code, rather than the supplementary fast track guidance, to avoid confusion.”
David continued “In terms of managing deficits, the requirement to make explicit advance allowance for all future expenses after reaching the maturity point means that whether schemes are planning a long term run-off for the scheme or a buy-out, we are seeing a moving of the goalposts from a funding perspective. This will result in requests for more money from employers and be a sting in the tail for some employers who may have finally been seeing some funding surpluses. This will again disproportionately impact smaller schemes where running costs typically represent a larger percentage of the liabilities.”
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