How the DB code of practice may affect your scheme

The draft code released last week recommended that schemes aim to manage the impact of scheme funding on the employer’s sustainable growth. This carried through the obligation placed on the watchdog in this year's Budget.

Some schemes consider two of the three risk management elements, but very few look at all of them together, actuarial experts have said. The BBC Pension Scheme is one of those that has built these three elements into a financial management plan.

This integrated risk management approach is very much the direction of the regulator

“This integrated risk management approach is very much the direction of the regulator," said Aidan O’Mahony, partner at consultancy Aon Hewitt. 

The code also recommends schemes consider whether the sponsoring employer can stand behind investment risks the scheme takes.

“[Schemes] need to monitor the situation on a regular basis,” said O’Mahony. “[They] need to take all three elements as they change throughout the year.”

Schemes should consider putting a contingency plan in place that integrates these three funding elements, he added.

The regulator expects any planned investments used by the employer to negotiate down future contributions to the scheme, but which are not later invested, to be made available to the scheme.

“It does mean the trustees are going to be monitoring that position and if they get desperate for funds they might be looking into that in more detail,” said Malcolm Rochowski, corporate consulting actuary at consultancy Barnett Waddingham.

Employers must therefore be careful about plans they make for capital investment, he added.

Schemes may need to change their governance as a result of the regulator’s recommendations and trustees may need to carry out more regular assessments of the employer’s strength, in particular how it can withstand its pension fund increasing in size.

Paul Kitson, partner in consultancy PwC’s pension advisory practice, said smaller funds may not be in a position to put large amounts of resource towards this.

“The expectation is that it will be for large funds and the adviser community to get to grips with this and what it means, and package that in a more affordable way for smaller funds,” said Kitson.

A lot of this underlines the wider direction of travel we have seen over the past year or so, he added, so much of the code's content has not come as an unwanted surprise for schemes.

“[The regulator has been] being more precise with a smaller number of cases,” said Kitson. “It’s more closely involved with that number of cases while they’re going through their valuation,” he said.