Many defined benefit (DB) pension schemes are finding the new Funding Code challenging, according to Aon.
The first DB schemes are completing their first valuations under the new code, which came into force in September last year. The intervening 12 months have seen an improvement in funding levels, which Aon’s Emma Moore said raised questions about some areas of the code.
“Most UK pension schemes are simply much better funded these days compared to 2018, when the idea of the Funding Code was first raised,” said Moore, an associate partner at the consultancy giant.
“The first-time adoption issues facing every scheme are different, but there is flexibility in the new regime, and many stakeholders have been willing to be pragmatic when addressing them.”
Alex Beecraft, Aon
“That can’t help but make you feel that the key reasons that drove the introduction of the Code are now much less relevant – but the baseline for funding standards has been raised both prior to and since its introduction last year.”
Covenant in focus as underfunded schemes continue to struggle
She added that, while the majority of schemes have continued broadly as before, there is a minority for whom the new regime has meant more significant change.
“In particular, more poorly funded schemes are having to reconsider whether additional security is available to strengthen their position,” Moore explained. “Where this isn’t viable, there are some schemes where the addition of the Funding Code has done little to improve the situation.”
Covenant is one area where the impact has been most visible, Aon said. Schemes that are more reliant on funding from their sponsor have needed to gather more information to demonstrate the strength of their covenant and the way in which it supports the scheme.
Alex Beecraft, partner at Aon, said: “The new Funding Code and covenant guidance have brought the expected challenges for schemes, particularly where parent company guarantees are significant or covenant information is limited.
“The first-time adoption issues facing every scheme are different, but there is flexibility in the new regime, and many stakeholders have been willing to be pragmatic when addressing them.”
He added that the positive side of the new requirements is that they go further in requiring the integration of covenant with investment and actuarial aspects.
TPR says strong funding ‘must not breed complacency’
Speaking at Pensions Expert’s DB Strategic Summit last week, David Walmsley, director of trusteeship, administration and DB supervision at the Pensions Regulator (TPR), noted that more than 75% of schemes are now in surplus on a low dependency basis, with nearly half in surplus on a buyout basis.
He said this funding shift opens “new strategic options for trustees” but warned that “strong funding must not breed complacency”.
He added that TPR expected around 80% of schemes to meet “fast track” requirements, reducing the regulatory burden they face. Schemes opting for the “bespoke” route should engage early with advisers and employers to shape appropriate strategies and to prepare for valuation submissions, Walmsley said.
