TPR, PPF propose tiered approach in asset information reform

TPR uses asset class information to help measure investment risk and the PPF uses it to help calculate the levy, but the two bodies are concerned that information currently acquired does not sufficiently represent the growth in allocation to bonds over the past decade. 

Bonds now make up more than two-thirds of assets held by defined benefit pension plans, and so “it is increasingly important to be able to assess the investment risks within schemes’ bond allocations by maturity, credit quality and currency — rather than simply to distinguish them from growth (return-seeking) assets, such as equities”, the consultation document states.

We believe this more detailed asset breakdown should be relatively straightforward for most schemes to provide and, in many cases, will already be included in regular reporting from investment managers

TPR, PPF

It also noted a change in growth assets, with schemes increasingly moving away from traditional equities and towards strategies like diversified growth funds, a trend particularly pronounced among smaller schemes.

The raft of changes is intended to further TPR’s ambition to be “clearer, quicker and tougher”.

“Our proposals on the changes to asset classes fit within a wider programme of change — in particular, TPR’s implementation of the new funding code and changes to TPR systems for future scheme returns,” the document explains.

It adds that the regulator plans to update its IT systems to facilitate the proposed changes, its introduction being timed “to support the introduction of the new code”.

Schemes will have “sufficient notice” before its implementation, at which point the PPF “would then expect to make associated changes to the PPF levy rules”.

Small schemes spared the burden

Recognising the administrative and financial difficulties that a new tranche of reporting requirements could present for small schemes, the proposal is for a tiered system to be introduced that acknowledges the differing capabilities of schemes of different sizes.

Small schemes are to be placed in tier one, and “will see only minor changes”, while larger schemes in tier two will be expected to provide “more granular data”.

The largest schemes, in tier three “will also continue to carry out the bespoke stress calculation, as required under the PPF levy rules”, the consultation proposes, and schemes will be able to voluntarily “trade up” tiers should they think they can provide the required information.

“We believe this more detailed asset breakdown should be relatively straightforward for most schemes to provide and, in many cases, will already be included in regular reporting from investment managers,” the consultation notes. 

“The bespoke stress calculation also requires information on the sensitivity of the portfolio to changes in interest rates and inflation and calculating the impact of our specified risk-factor stresses, although this will continue to be required for only the largest schemes.”

Defining the tiers

TPR and the PPF lay out the proposed thresholds that will determine which schemes are placed in which category.

It is suggested that the boundary between tiers one and two should be set at £20m, based on section 179 liabilities at the scheme’s most recent valuation.

The document explains: “This would mean that a majority of schemes would fall in tiers two and three, and therefore have their investment risk assessed against more detailed information, while offering a simplified approach for around two-fifths of schemes.”

Should this initially prove challenging for schemes at the lower end of the tier two bracket, the document suggests that the threshold could be set higher to begin with. Part of the purpose of the consultation is to seek views on whether and where any interim threshold should be set.

It proposes that the boundary between tiers two and three be set at £1.5bn, which it notes “is consistent with the current threshold for provision of the bespoke stress calculation for the PPF levy”.

“This means that approximately 200 of the UK’s largest schemes would continue to be required to submit the additional [tier three] information,” it states.

Changes to asset class information

There are a number of changes proposed to the asset class information collected by the two bodies, which the consultation document splits into two categories: bonds and “equities and other assets”.

Changes to information about bonds include the introduction of a specific “UK government fixed interest bond” class to replace the more general “government bond” category that currently exists for all tiers.

Similarly, a new “UK government inflation-linked bond” category will replace the general “inflation-linked” category, while additional categories will be introduced for bond investments to “identify differences in maturity, credit quality and currency” for schemes in tiers two and three.

Schemes in tiers two and three will likewise see added a new “private debt bond” category, while schemes in all tiers will have to supply information pertaining to a new “sub-investment grade bond” category.

Under “equities and other assets”, schemes in tiers two and three will have to further break down their overseas equities into developed and emerging markets categories, though hedge funds will be removed as a category across all tiers.

A new diversified growth fund category takes its place, and schemes in tiers two and three will additionally have to account for a new “absolute return fund” category.

Commodities and insurance fund categories will be removed across all tiers.

The document also explains that, despite the introduction of new asset class information, it will not necessitate a change to the indices currently used by the PPF to “roll forward” asset information and ensure consistency between schemes when it calculates risk-based levies.

“Our view is that the benefits of moving to a more granular approach will be relatively marginal and likely to be outweighed by the costs and disruption of introducing a new set of indices (including additional licensing fees for schemes or their advisers seeking to replicate the roll-forward calculation),” the document states. 

Though the proposal is to retain the current roll-forward system, the consultation is seeking views on the appropriateness of this conclusion.

The consultation closes on June 10.