On the go: Seventy per cent of defined benefit schemes fall short of the Pensions Regulator’s ‘fast-track’ approach as proposed in its new DB funding code, according to analysis from Hymans Robertson.
The regulator has proposed a twin-track approach to valuations, under which schemes will be able to choose between a bespoke route or a more prescriptive fast-track option.
As Pensions Expert has previously reported, concerns were raised during the consultation on the new funding code that the fast-track proposal would be used as a benchmark against which bespoke options are judged, and that it may prove too rigid to allow for the latter to be of much use.
Now, according to Hymans Robertson, it would seem nearly three-quarters of DB schemes would not qualify for the fast-track approach.
By looking at the funding plans of a representative sample of its clients, the pensions consultancy found that 30 per cent would pass all four of the proposed fast-track tests: long-term objective, technical provisions, recovery plan and investment risk.
The remaining 70 per cent would not pass, leading the company to warn that, especially in light of Covid-19, TPR may need to be more flexible about the parameters of its new funding code if the fast-track option is to be feasible for most schemes.
Stephen Jasinski, associate investment consultant at Hymans Robertson, said: “Clearly, schemes are beginning to consider the impact of TPR’s code of practice, even though we are awaiting the final parameterisation of the framework.
“This will very much hinge on where these parameters are nailed down and, in particular, how they differentiate between different covenants.
“Two-thirds of schemes that passed the tests have a sponsor with a strong covenant rating. This suggests that fast-track will be a higher barrier to clear for those with weaker covenants.”
Where schemes failed the tests, Mr Jasinski said the most common reason was that their recovery plans were too long.
“In some cases, this will be because the deficit has increased since the recovery plan was set — notably in the context of the turmoil caused by Covid-19 — or because the recovery plan can no longer allow for additional asset outperformance,” he noted.
While pension funds already close to meeting the requirements should find it relatively straightforward to get up to the standard required by the fast-track route, Mr Jasinski warned that this “will be harder for schemes doing something quite different or where the gap is large”.
“To pass all four tests and comply with fast-track, cash requirements may have to increase for sponsors in the short to medium term. In the current environment where sponsor affordability is already constrained, this prospect will loom particularly large,” he said.
Setting definitive parameters will be the subject of a second consultation, expected next year, and Mr Jasinski said that it will be important to set these correctly given the lingering effects of coronavirus on scheme funding.
“TPR has said that it doesn’t have any specific targets for the number of schemes that will follow a certain approach. However, it is certainly trying to set fast-track at a level that is appealing to a number of schemes as a more prescriptive route to compliance,” he said.
“Given developments since the consultation was published it is likely that the parameters will need to be set towards the more flexible end of the spectrum, so fast-track remains an achievable target for most schemes,” he concluded.
