A year on from the introduction of the Defined Benefit (DB) Funding Code, the new regime is still seen as bringing more options for pension scheme trustees to consider, according to a poll by LCP.
Three-quarters of respondents quizzed during a recent webinar hosted by the consultancy said they believed there was still more for trustees to consider, including aspects of covenant, surplus, and investment strategy.
The findings follow similar analysis from Aon, which warned that while most schemes have adapted smoothly, those in weaker funding positions continue to face challenges.
“It’s really important for trustees to understand that not everything in the code is as rigid as it first appears and that there are flexibilities to be used by schemes.”
David Fairs, LCP
The LCP webinar, which included input from Andrew Dodd of the Pensions Regulator, explored how trustees could make best use of the regime. LCP advised trustees to focus on integrated risk management and utilise the flexibilities within the code where appropriate.
David Fairs, partner at LCP and a former senior executive at the Pensions Regulator, said: “The code has been in force for a year now and it represents a meaningful evolution in pension scheme management. It’s really important for trustees to understand that not everything in the code is as rigid as it first appears and that there are flexibilities to be used by schemes.”
On investment strategy, speakers discussed how the code’s resilience test can sometimes produce unexpected results – such as higher-risk strategies passing and lower-risk ones failing. LCP said trustees should avoid increasing risk just to pass the code’s tests, and instead use the regime’s principles to justify their approach.
The webinar also highlighted flexibilities around actuarial assumptions. For smaller, mature schemes, for example, expenses can be significant, but the code allows for flexibility to reflect individual circumstances and objectives.
Trustees should take a proportionate approach to employer covenant, LCP said, incorporating new requirements without over-engineering the analysis.
Meanwhile, funding improvements following the 2022 gilts crisis have prompted renewed focus on endgame strategies and surplus extraction, with measures expected in the Pension Schemes Bill to support this. In addition, superfunds are expected to present a viable alternative to insurance buyouts, and trustees will be expected to weigh the implications for members and sponsors.
Jacob Shah, investment partner at LCP, said: “Now is the time for trustees to engage proactively with their covenant and investment advisers to ensure their strategy is not only compliant, but they meet the requirements of the code in a proportionate and pragmatic way.”
