On the go: The Pensions Regulator has stood by its new defined benefit funding code following criticisms from open DB schemes, arguing that a bespoke route will allow these pension funds to continue their current investment strategies.
In a blog published on Tuesday, David Fairs, TPR’s executive director of regulatory policy, analysis and advice, said the watchdog has been taken by surprise by the several estimates on the additional costs schemes will have to bear with its new funding code.
One of these predictions was made by the £30bn Railways Pension Scheme in November, which stated that open DB schemes could see their liabilities increase between £120bn and £160bn due to TPR’s new funding rules.
The Railways scheme stated that the current regime allows open schemes to invest in a way that reflects their particular characteristics.
Under TPR’s proposals, which creates a twin-track DB funding approach, “there would be significant additional (and unnecessary) costs” imposed on open schemes, as they “would be forced into following the approach suited to closed schemes that deliver lower returns to members”.
In his blog, Mr Fairs explained that it is reasonable to give immature schemes — such as open DB pension funds — “room to invest in more volatile, but higher return-seeking assets”.
Mr Fairs noted that while schemes that start to experience lower levels of new entrants and began to mature should start to plan some derisking, truly open schemes with a strong flow of new members may always be immature, in which case TPR recognises that “schemes might invest in more illiquid and volatile assets in the expectation of a higher return”.
He said: “They might anticipate that higher return in their discount rate and consequently set lower technical provisions — the rationale being that there is sufficient time for the scheme to ride out that volatility.
“As a consequence, their long-term funding objective may be some way off. And if they continue to remain open and in a ‘steady state’, they will continue to stand still and not progress towards it.”
Mr Fairs considered that open schemes could continue to “invest based on their expectation that they will remain open” in a bespoke funding arrangement under the new code.
He said: “Going bespoke may mean more regulatory engagement, but in many cases there is unlikely to be any (or only minimal) additional engagement if the thinking has been done, is clearly explained and well documented.”
However, trustees of open schemes should be able to evidence to TPR how they could “manage the risk of their scheme closing or maturing faster than expected”.
TPR will issue a second consultation on its DB funding code, taking account of the responses to the first consultation and the economic scenarios post-pandemic, in 2021.
