By Jonathan Seed, Partner at Hymans Robertson
We’re delighted that TPR’s new funding code includes a section dedicated to open schemes, and gives them funding and investment flexibility.
What does the new funding code say about open schemes?
The long-awaited funding code arrived on 29 July 2024. It includes good news for open scheme trustee and sponsors. The Regulator acknowledges that open schemes play a ‘vital role’ in giving members retirement benefits, and will consider open schemes through a different regulatory lens.
We’re confident the new code provides the flexibility for open schemes to pursue sustainable and affordable long-term strategies. If they use that flexibility, we’re optimistic that DB schemes will stop closing – some may even reopen to accrual.
The new code will apply to valuations from 22 September 2024 and is likely to be with us for at least the next decade. That gives open schemes the confidence to put in place long-term strategies that are less sensitive to market movements.
How does the new code treat open schemes?
The Regulator recognises that open schemes are different from closed schemes, and so they need specific guidance that reflects their unique characteristics. The funding code mentions open schemes more than 50 times.
A dedicated chapter sets out a lot of flexibility for open schemes’ funding and investment strategies. The code sets out a framework within which a range of funding and investment approaches is possible.
The code lets open schemes focus on sustainable and affordable funding. Low-dependency or long-term funding targets can be viewed as a contingency plan if the scheme closes.
For discount rates, the code says the expected returns on assets are a reasonable alternative to traditional ‘gilts plus’ funding. ‘Gilts plus’ may have been leading some schemes to adopt a gilts-based strategy to manage interest rate and inflation risks.
What should trustees and sponsors of open schemes do?
Understand the new regulatory framework and how it would apply in your circumstances.
Confirm your scheme’s current duration, and when it will reach significant maturity. Consider how the duration will change if the scheme stays open and if the scheme closes. Duration is valuable information on your time horizons for different phases of your funding and investment strategy.
Know what options you’ll have at your next valuation.
Develop your funding and investment approach while the scheme remains open, and a contingency plan if the scheme were to close. Think about how ‘plan A’ and ‘plan B’ fit together.
Consider what training you need.
How can Hymans Robertson help?
We’d be happy to independently assess your funding approach and how it fits in with the options in the new framework. At the very least, this will give you free training and early insight into what the new code is likely to mean for your open scheme.
What experience do we have with open schemes?
We’re the leading adviser to open DB pension schemes in the UK. In the private sector, we provide actuarial, secretarial, administration, investment and corporate advisory. In the public sector, we have over 100 years of experience in the LGPS, and we advise more LGPS funds than any other firm.
Our deep experience lets us innovate. For example, we’ve taken the unique Hymans’ public-sector concept of a contribution stability mechanism and adapted it to work for private-sector open DB schemes. We recognise that open schemes can take a long-term view of investments, and think differently from closed schemes about expected return and risk, so we can help them avoid significant balance sheet hedging.
What have we achieved so far?
We’ve been a leading adviser to open DB schemes for decades. In 2022, we formed a team of open DB experts from people in our actuarial, investment and administration teams. The team aims to amplify our support to trustees, sponsors and members, to enable them to make the most of the opportunities available to open DB schemes.
We’ve engaged with TPR and the Work and Pensions Committee to ensure they recognise that open schemes are different from closed schemes. We responded to the Committee’s Call for Evidence on the Future of DB and the Regulator’s consultations on the DB funding code.
It’s also important to hear opinions from trustees and sponsors. At our roundtable in February 2024, we met leaders of some of the UK’s largest open DB schemes. The event gave professionals a forum to share experiences, and to explore the challenges and opportunities for open schemes.
For a wider view, you can watch our webinar on the new funding code’s practical implications.
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