The second consultation into the Pensions Regulator’s new defined benefit funding code will be delayed until “late summer” 2022.
Writing in a blog post, David Fairs, TPR’s executive director of regulatory policy, analysis and advice, said it was “vital we take the time to get it right”.
As Pensions Expert reported on Tuesday, the announcement was trailed at an SG Pensions Enterprise event, at which Fairs confirmed it was unlikely the consultation would be launched until the summer, according to a blog post by AgeWage executive chair Henry Tapper.
The plan was originally for the consultation to be published on the back of draft regulations from the Department for Work and Pensions, but Fairs said it was important that the regulator takes “the opportunity to learn from the DWP’s consultation on the draft funding and investment regulations, which we expect to be published in spring 2022”.
When introduced, the changes will be forward-looking, meaning that schemes with valuation-effective dates on or after the code’s commencement date will be affected
David Fairs, TPR
“And we want to ensure that stakeholders have ample opportunity to engage with and input into our proposals as they are developing,” he added.
“Our second consultation on the draft code will not therefore follow immediately after DWP’s consultation on the draft regulations, but will be launched in late summer 2022.”
He stressed that the existing code and funding regime will remain in place “until the new legislative requirements and the new code come into effect”.
“When introduced, the changes will be forward-looking, meaning that schemes with valuation-effective dates on or after the code’s commencement date will be affected,” Fairs continued.
“I hope this means there is no uncertainty around our expectations for DB schemes in the meantime. It is very much business as usual, in line with what our annual funding statement sets out on valuations already in progress.”
Bespoke route will be ‘scheme-specific’
On the form the new code will eventually take, Fairs stressed that the principles established in the first consultation, which set out a ‘fast-track’ and a ‘bespoke’ route for schemes to take depending on their funding positions, “remain the right ones”.
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.
“One area that generated a lot of interest during our first consultation was how the bespoke route would work in practice and how risk would be measured and justified. In particular, there were some concerns around loss of scheme-specific flexibility,” he noted.
“We are clear that bespoke will very much be a scheme-specific funding solution, with the extent of the flexibilities within it defined by the constraints of the legislation.”
New research from Hymans Robertson suggests that as many as 40 per cent of FTSE 350 schemes will probably have to take the bespoke route, though it stressed that doing this properly could realise cost savings.
“One of the new requirements in the Pension Schemes Act 2021 is that trustees will have to explain how they intend to manage and support the risks their scheme is taking along the journey to their long-term objective,” Fairs continued.
“We need a consistent way of measuring risk across all schemes, a common language, and in our consultation we proposed to measure risk in bespoke funding plans against fast-track, noting that fast-track already incorporates some risk based on covenant and maturity.”
Employers’ wish list for TPR’s DB funding code
Employers have expressed support for some elements they would like to see outlined in the second consultation on a new defined benefit funding code, which is expected in the next few months.
He added that TPR is “conscious that there needs to be room for schemes to approach risk in a way that is consistent with their individual circumstances”, and promised that the regulator is considering “the best approach for trustees to demonstrate compliance with the legislation and measure and evidence that the risks they are taking in bespoke are supportable”.
“We are also considering how best to incorporate covenant into both fast-track and bespoke to ensure it can be used in the most flexible way to justify risk-taking,” Fairs said.
“We look forward to engaging once more with our regulated community later in 2022 as we work together to develop and consult on a DB funding code that works for all and put savers at the heart of all we do.”
