By Mark Tinsley, Principal and Senior Consulting Actuary at Barnett Waddingham
Back then, many sponsors were (justifiably) worried the proposals would lead to a material increase in contribution payments. TPR itself acknowledged the “significant impacts for some schemes” during a time in which it was positioning itself as taking a “clearer, quicker and tougher approach to regulating all forms of pension arrangements”.
But much like the pandemic changed the wider world around us, a lot has changed in the UK DB pensions landscape over the past four-and-a-half years. What is striking today is how few schemes will be materially impacted by the final guidance in the code, mostly thanks to the substantive improvements in funding positions in recent years.
To illustrate this, TPR’s supporting analysis published alongside the code suggests 81% of schemes will be able to opt for a “Fast Track” valuation submission at no extra cost (note: schemes also have the option of making a “Bespoke” submission – many of the remaining 19% of schemes that do not meet all of the Fast Track tests will be able to demonstrate compliance in this way).
2. …but still risk of cliff edges for the few
Nonetheless, despite most schemes being well placed to meet the new requirements, the issue of a compliance cliff edge is still a real risk for a minority of schemes.
The schemes that are most exposed to significant increases in contributions are those that are poorly funded and are already, or soon will be, deemed to be ‘significantly mature’ – the point at which schemes will need to be, as a minimum, targeting full funding on a ‘low dependency’ basis and planning to be invested in a low dependency asset allocation.
The impact may be particularly severe for those smallest schemes that are now being directed to fund future expenses in advance. Whether or not TPR is requiring you to do this depends on whether your scheme rules hardcode that the employer meets expenses or not – so a quick review of your rules may be worthwhile!
Crucially, with the publication of the code, trustees and sponsors now have all the necessary information to assess the impact of the new requirements for their scheme with confidence. So, if you haven’t already, I would encourage you to do this as soon as possible – better to give everyone as much time as you can to manage any unexpected and unwanted surprises.
We have prepared a New DB Funding Code checklist to help you work through the detail of the code.
3. A less formulaic approach
While I credited the rises in gilt yields for easing the expected financial burden from the new code, both TPR and the Department for Work and Pensions are also deserving of some praise for making important amendments to the initial 2020 proposals and subsequent 2022 drafts to reduce the burden (both financial and regulatory) too. Whether partially forced upon them by the 2020 pandemic and 2022 gilts crisis, or not, the final regulations and code strikes a better balance between making the regulatory expectations clearer without being overly prescriptive.
For example, the removal of the “maximum risk equation” – a formula that sought to spell out the maximum level of investment risk that could be taken on a scheme’s journey plan – from the 2022 draft and the adoption of similar but a more principles-based approach is welcome. Similar positive changes have also been made to the 2022 draft to introduce more flexibility in respect of the low dependency asset allocation.
4. An uncertain burden
There is a debate to be had as to whether the new measures are an important additional layer of protection for pension scheme savers or whether they are a solution to yesterday’s problem. Central to this discussion is the additional costs of compliance associated with the new reforms, which has long been a concern, particularly for schemes that are well funded and/or open to new members.
TPR has made some helpful changes in this regard, including extending the definition of small schemes to those schemes with 200 members or fewer (an increase from a maximum of 100 members in the draft code).
Nevertheless, it is disappointing that we still do not have a clear picture of the full scope of the additional work required. We do not have sight of the much-promised new Employer Covenant guidance that will complement the code and help trustees understand what constitutes a proportional approach. In addition, TPR is still considering the form of the new Statement of Strategy document, following a March 2024 consultation on this topic.
Based on the drafts shared as part of the most recent consultation, it appears as if the Statement of Strategy could be a very significant piece of work – the draft example shared by TPR ran to over 6,000 words! While TPR was already proposing a number of sensible measures to streamline the production of this document, the hope is that the regulator considers further ways to reduce the compliance burden, particularly for well-funded schemes. If so, it will be worth the wait.
5. Opportunity to reassess objectives
Long-term strategic planning is at the heart of the new reforms and so the regulatory certainty provided by the new code means that now is an opportune time for schemes to review their strategic options.
Consistent with TPR’s own guidance, reassessing the full range of end game options is particularly important for the large number of schemes which are already, or will soon be, fully funded on a buyout basis – deciding who benefits from the existence of a surplus, and in what way, are perhaps the most important decisions trustees and sponsors will ever make.
In particular, reforms to legislation (both actual and proposed) mean that landscape has changed. It is no longer the case that an immediate buyout is the only logical option once affordable, as was arguably the position for the vast majority of schemes prior to these changes. Alternatives include delaying buyout and continuing to run-on (for medium and large schemes) and so using the surplus for the members and/or company rather than passing to an insurance company, as well as the potential option of entering into a public consolidator (for small schemes).
|
