“An important message is that by the time a pension plan is mature, it should have a low dependency on any external sponsor. That means a strong level of funding, good quality of liquidity, and a low level of risk. This is a long-term objective, more than 10 years away for most, when pension schemes will be significantly smaller. It’s not a short-term goal and it will be crucial to not overreact. One challenge will be that companies are just passengers in the meantime - they will need to find ways to embed themselves into management and strategy of the pension scheme.”
Cash funding
“A crucial clarification is that deficit cash funding is not expected to have to go on forever. Some advisors who have been pushing trustees to ask companies to extend deficit contributions, despite adequate funding levels, should now realise the Regulator does not expect arbitrary outcomes, and nor would this be a sensible allocation of capital for the UK economy. The theoretical cost of insuring all DB schemes would be over £900bn and that is just not a viable scenario.”
Dividends and equitability with other stakeholders
“The signal on dividends to shareholders versus deficit repair contributions will be helpful. It should not be a one-size-fits-all approach.
Fairness would be assessed depending on a number of factors including covenant strength, value leakage, recovery plan length and additional support through contingent assets. This would mean many companies and trustees would be able to carry on with business-as-usual when it comes to dividend policy, as long as clearly equitable and justifiable.”
Stephen Soper, partner and senior pensions adviser at PwC, said: “The proposed Pension Regulator’s DB funding code will significantly increase its ability to regulate the UK’s defined benefit schemes, and provide greater clarity around circumstances that warrant the use of its funding powers.
“Combined with proposed legislative changes in the 2020 Pensions Bill - criminal sanctions and the threat of substantial fines - this code has the potential to significantly change the way schemes are funded in the coming years.”
Stressed schemes
“For members of DB pension schemes supported by stronger employers, the new code should drive more cash funding in some cases, reduced risk and improved security of their benefits.
“But schemes with weak employers may find this could accelerate their journey into the Pension Protection Fund (PPF), resulting in a haircut to member benefits.
“The PPF have estimated around 700 employers are unlikely to ever fully fund their schemes’ benefit payments. Trustees trying to fill the funding gap with a high risk investment strategy may herald the first examples of an employer being nudged towards insolvency by its DB pension scheme.”
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