Commenting on the publication, LCP Partner and former Executive Policy Director at TPR David Fairs said: “The Funding Code has been a long time coming. Initial work commenced in 2018, and TPR’s first consultation on the new Code was published just before the pandemic. At that time, many schemes had a significant deficit, and the new regime was intended to provide greater security for members. As a result, there was real concern about the financial strain the new Code might put on sponsors.
“The journey to final publication has been disrupted by two elections, numerous prime minister changes, achieving Brexit, a pandemic, the gilts crisis and a European conflict. Changes in financial markets mean schemes are now much better funded, so the pressure for additional contributions has reduced, and we have a new Government. As a result, this final Code has landed in a very different world.
“Importantly, will it help to deliver the growth the Government is looking for? The new funding regime’s underlying path to low-dependency investments appears at odds with the Government’s clearly stated focus on growth and investment in the UK economy. The Government’s pensions review announced on 20 July has a strong emphasis on boosting productive UK investment – and the funding code does not encourage DB schemes in that direction – although there does appear to be greater flexibility in the final Code.
“The new Code will require all trustees to carry out proper risk management - which is a good thing - but the new regime now seems to be a heavy burden in a world which has moved on since the original draft. The lack of flexibility in the regulations post-significant maturity means many schemes will need to think creatively to avoid trapped surplus. That puts greater emphasis on the need for new legislation to make it easier for schemes to run on and permit easier extraction of surplus if we are not to have schemes defaulting to buy out rather than considering options that involve investing in UK growth.”
LCP Partner and Head of LCP’s DB Funding Group Richard Soldan added: “Now that we have the new Code, trustees and employers can move forward and properly assess the impact of the new regime – but, given the changes in funding levels for most schemes, is it solving a problem that no longer exists? The impact assessment published by DWP suggests minimal aggregate changes to employers’ contributions.
“The new regime means all trustees and sponsors will need to consider new concepts in each of the actuarial, investment and covenant areas and report their conclusions on these to TPR – even if their scheme is fully funded. This will put the onus on trustees to consider these topics carefully, and employers will want to be involved to make sure their interests are taken into account.
“At a more detailed level, I’m pleased to see some more potential flexibility for open schemes, recognising the very different characteristics of such schemes compared with the vast majority of schemes in TPR’s regulatory universe. It’s vital that TPR’s approach does not unduly compromise the ability of such schemes to continue to provide good pensions to their members.”
Mark Tinsley, Principal and Senior Consulting Actuary at Barnett Waddingham says: “Most schemes are already well placed to comply with the requirements of the new funding regime. Nonetheless, the regulatory certainty provided by publication the new code means that now is an opportune time for schemes to review their funding strategies and long-term objectives.
“Reassessing the full range of options is particularly important for the large number of schemes who are already, or will soon be, fully funded on a buyout basis – deciding who benefits from the existence of a surplus is the most crucial decision trustees and sponsors will ever make."
Mark also says that managing the cost of compliance should be a key focus as the Regulator finalises the related Statement of Strategy guidance: “Following the recent improvements in scheme funding, some have argued that the new measures are a solution to yesterday’s problem. While we still think the new regulations have a significant role to play in protecting savers, managing the additional cost of compliance has always been a concern.
"Therefore, we encourage the Regulator to reduce the compliance burden associated with the Statement of Strategy, which is the final piece of the puzzle that the industry is still awaiting.
“Although the journey has been marred by unforeseen obstacles and significant turbulence, the final guidance is all the better for the detours enforced upon it by the pandemic and the gilts crisis.”
David Hamilton, Chief Actuary at Broadstone: “It’s a great relief that we finally have sight of the final version of the Funding Code – some thought this day would never come. Trustees and their advisers, particularly those with 30 September or 31 December valuation dates, can now start to plan with greater certainty for the additional work that is needed.
“Of course, there is a lot of detail to process and some important supplementary guidance still to follow such as that relating to employer covenant assessment. We hope that our feedback regarding the burden on smaller schemes is reflected not just in the code itself – which regularly mentions a proportionate approach – but in the way in which the new regime is monitored and enforced.”
John Dunn, Head of Pension Scheme Funding and Transformation at PwC UK, said: “The Pensions Regulator’s new code of practice on funding defined benefit pensions was today laid before parliament, which should ensure that the code will be in force by November, giving the pensions industry much needed clarity. Trustees and sponsors of pension schemes with valuation exercises scheduled to take place in the Autumn will be particularly relieved; in the absence of this code, they would have had to plot a course without a detailed map.
“The code’s announcement comes within weeks of the new government coming into power, and follows quickly on from the ‘surprise’ Pensions Bill, and the announcement of the first phase of a landmark review to boost investment, increase pension pots and tackle waste in the pensions system. These are all positive signs that pensions and savings are seen as a key element of the government’s mission to boost growth.
“If the momentum continues, we could well see further development of initiatives that give sponsors and members flexible access to surplus assets in pension schemes sooner rather than later.”
Katie Lightstone, Employer Covenant and Restructuring Partner at PwC UK, said:
“Trustees will now be in a position to understand what the new funding framework means for their scheme - and whether it’s ‘business as usual’ or whether more substantial changes are needed. For schemes and sponsors that have been waiting for the final parameters to define their own long term funding target, this is a big moment and might unlock long-running debates.
“Much has changed over the Code’s seven-year development period, and for some well funded schemes the mandatory quantitative covenant metrics may feel like an admin burden. Trustees and sponsors should consider how to get the most value from the new framework, given improved funding positions and changes to their covenant. We’re already seeing the new covenant approach driving increased collaboration between trustees and sponsors - with the required information such as cash flow forecasts helping trustees get to the heart of the core covenant drivers.
“In a recent PwC client survey, 44% indicated the most challenging thing about the new Funding Code would be assessing the period over which there is ‘reasonable certainty’ over the covenant. The requirement for trustees to assess their ‘covenant reliability’ and ‘covenant longevity’ periods will likely be valuable in supporting them to consider their endgame options, as well as driving a much broader approach to covenant. This includes looking beyond near-term forecasts to economic drivers of business performance; sector trends; sustainability risks and opportunities; and the potential for disruption,including from geopolitical risks and AI.”
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