But, according to Jon Forsyth, partner at LCP, the current set of proposals leaves a ‘shopping list’ of problems and issues which need to be addressed if the new funding regime is to be a success. With DWP yet to respond to its July 2022 consultation and TPR still running an open consultation, there is still time for things to be changed in the underlying draft regulations, but time is running out according to LCP.
Jon Forsyth has identified ‘six to fix’ – six areas where the proposed regime needs refinement or is not fit for purpose. According to his analysis (published today here ), the key issues are:
1. The rigidity of the new rules around de-risking
A central flaw is the fact that DWP regulations – which have the force of law – require all schemes to reach low dependency by the time they are ‘significantly mature’ – regardless of individual circumstances. Whilst TPR have tried to be flexible in their Code, this is not something which can be flexed by TPR on a case-by-case basis if it is written into the law of the land without exception. Whilst this may be the right strategy for many schemes it will not fit all and could have significant adverse unintended consequences in some cases.
2. The lack of a transition period
The DWP regulations come in without a transition period, which could create real problems for schemes who had previously had funding plans with a different time horizon, or who are currently taking more investment risk than would be permitted in the new system.
3. The rules around investment strategy for mature schemes
If all schemes at maturity are required in the DWP regulations to invest in a similar way (one which ‘broadly matches’ the cashflow out of the scheme, and which is ‘highly resilient’ to market fluctuations), which we believe is what is currently envisaged, this could result in a heavy movement of pension fund investments into a limited range of assets over a relatively short time frame. As the LDI crisis showed, this can expose schemes to ‘systemic risks’ of the sort that regulators are keen to avoid.
4. The lack of clarity on recovery plans
The DWP regulations explicitly state that deficits must be cleared ‘as soon as employers can reasonably afford’, but there is no clear definition of what this means in practice for employers. An over-emphasis on clearing deficits could be to the detriment of business investment and other activity essential to the long-term future of the sponsoring employer.
5. Flaws in the use of ‘duration’ as a measure of maturity
DWP’s current proposals envisage that a scheme is ‘significantly mature’ if it has a remaining duration (on a specific technical definition) of 12 years. But the way in which this figure is measured can create highly volatile results. Jon Forsyth cites the example of two schemes where the date of significant maturity shifted by nine years over the course of the 2022 calendar year. Such volatility would make it impossible for a scheme to make stable and predictable funding and investment plans.
6. No mention of climate change risk
As LCP has previously highlighted, climate risk has received virtually no attention in TPR’s documents, and there is a risk that if TPR is not explicit in this document about the importance of integrating climate considerations, trustees and schemes may not give this issue the priority it deserves.
Commenting, Jon Forsyth, partner at LCP said: After years and years of white papers, Acts of Parliament and consultations, you would hope that DB schemes and their sponsors would now be clear about the new funding regime and able to plan accordingly. TPR’s Code now seems close to a finished product, but there is a clear shopping list of issues still to be resolved in DWP’s regulations. DWP and TPR must give urgent attention to addressing these concerns to avoid the risk of imposing a potentially flawed regime, which could inadvertently undermine the security and stability of the pension system.
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