New DB funding code could be delayed until 2022

Though light on specifics, the regulator’s interim response published on Thursday specifically acknowledged the concerns raised by respondents about the detail of its twin-track funding regime, proposed in a consultation launched in March 2020. 

Schemes that opt for a prescriptive fast-track funding arrangement would be subject to less regulatory scrutiny, while those opting for a bespoke arrangement would face stricter oversight. 

TPR’s interim response cited worries around the fast-track guidelines for open schemes, the “risks associated with where fast-track guidelines would be set”, and the potential loss of flexibility that would arise from using the fast-track approach as a benchmark for the bespoke route.

Pension schemes that are due valuations this year will have the challenge of navigating this ongoing regulatory uncertainty. Any further delays to timings may run the risk of stifling decisive action from trustees and sponsors in the meantime

Laura McLaren, Hymans Robertson

It also acknowledged concerns about the increased evidential burden required by the bespoke route, as well as fears that route may be seen as “second best”; and other fears to do with the “watered-down” reliance on covenant, “and what a greater trustee focus on covenant visibility would mean for schemes’ ability to rely on covenant beyond the medium term”.

TPR’s contention was that many of these concerns stemmed from “misunderstandings around what we had proposed”. 

“In many cases, the respondents agreed with the overall direction of the proposals but suggested changes to the approach taken,” it said. 

“Some other issues raised were more fundamental and respondents also came up with a lot of interesting views and ideas. We will consider all comments carefully and with an open mind,” TPR stated.

David Fairs, TPR’s director of regulatory policy, analysis and advice, revealed in a Pensions Expert podcast in August last year that changes would be made to the fast-track approach in light of Covid-19.

TPR’s interim response acknowledged the disruptive impact of the Covid-19 pandemic, as well as Brexit, stating that, though the “key principles” set out in its consultation “remain relevant in these challenging times”, these disruptive events will be borne in mind “when we carry out our impact assessment and develop fast-track guidelines for consultation”.

There will be a second consultation on the specifics of the funding code, but that is not expected until the second half of the year.

Delays are a real prospect

LCP partner Steve Webb told Pensions Expert that, while the tone of the interim response was conciliatory — suggesting the final response may see meaningful changes made in response to feedback — there is a danger that the timeframe could be “slipping”.

“TPR’s initial consultation has clearly generated a high level of interest, and the regulator’s response suggests they are open to making changes in response to the concerns that have been raised,” he said.

“But we should not expect things to move swiftly. If TPR’s next consultation does not happen until later this year, it seems very unlikely that valuations due on or before January 2022 will come under the new regime.”

Hymans Robertson partner Laura McLaren seconded this concern, arguing that schemes with valuation dates falling between now and the second consultation will have to cope with significant uncertainty about the regulations.

“At this stage the interim response doesn’t offer much in terms of specifics. Those will come in the second consultation, which TPR has confirmed it will not be launching until the second half of 2021,” she said.  

“Certainly, pension schemes that are due valuations this year will have the challenge of navigating this ongoing regulatory uncertainty. Any further delays to timings may run the risk of stifling decisive action from trustees and sponsors in the meantime.”

A TPR spokesperson said: “It will take time before we publish a revised DB funding code for consultation, partly due to the legislative timetable, but also so that we can properly analyse the comments we have received from the industry and test the impacts of our proposals. We will continue to communicate next steps to our regulated community as we get more certainty in the coming months.

“It is unlikely that the new code will be in place before 2022, so those schemes with valuation dates in 2021 can have more certainty that the current code will apply to them. The approach set out in the new code is based on existing IRM best-practice, and builds on the messages we have given in the past few years on what we expect schemes to do; for example, in our annual funding statement regarding long-term objective and journey planning.”

The spokesperson continued: “For schemes already applying good practice, we do not expect significant changes to how they approach funding and investment when the new code is published.”

Getting fast-track right is vital

Ms McLaren did say that the interim response provided some “welcome reassurance that TPR will address the concerns raised by respondents”.

“In particular, many trustees and sponsors will be comforted that both Covid-19 and post-Brexit recession risks will be factored into where the final fast-track parameters are pinned down,” she said.  

“Given the challenging developments since the consultation was published, there has been a growing sense that these would need to be set more flexibly so fast-track remains an achievable target for most schemes, at least in the short term.”

She added that she hoped the second consultation would remove the threat of overreach by the fast-track approach, which, as Pensions Expert has reported previously, might otherwise place undesirable restrictions on the bespoke route.

Raj Mody, global head of pensions at PwC, highlighted the other side of that concern: that, should the standards governing the fast-track model be too strict, it will force schemes to create bespoke models and add unnecessary work for the regulator.

“While in principle a twin-track regime of fast-track and bespoke sounds right, it will be crucially important to set the boundaries and flexibilities of fast-track appropriately,” he said.

“It’s in no one’s interests to have a situation where too many schemes have to go down the bespoke route. That would add an overhead to the industry, which already has enough regulation on its plate.

“It would also add a workload to the regulator where its attention may be better directed at true problem areas and not pension schemes that are generally well-run and well-supported,” Mr Mody concluded.