TPR’s fast-track proposal 'risks levelling down by employers'

Consultancy Hymans Robertson warned of a decline in standards at the top of the industry in a letter sent to the watchdog dated July 9, seen by Pensions Expert.

Responding to the regulator’s consultation on the future of DB funding, which suggested it would take a light-touch approach to schemes that show they are well funded on prudent expectations, Hymans said “the new code could result in less valuable funding than plans already in place”. 

TPR’s enforcement must not evolve in such a way that this undermines the scheme-specific nature of the bespoke route, and requires all schemes to fund to fast-track equivalence

Laura McLaren, Hymans Robertson

Fast-track will demand that schemes show they are on track to be fully funded, on a discount rate in the range of 0.25–0.5 per cent, by the time their cash flows turn significantly negative.

Employers taking the bespoke alternative would have to show they are unable to afford added security or have put in place mitigations for additional risk, but under the framework, employers that are ahead of these expectations could slow their progress to the endgame without fear of reprisal.

Laura McLaren, a partner at the consultancy, explained: “Pressure to make fast-track a stiffer test comes from the risk trustees ‘level down’ from stronger current funding plans.”

She said an added factor to consider would be the falls in most funding levels seen amid Covid-19, and potentially if Britain’s exit from the EU takes a more chaotic turn. Nonetheless, “if schemes going down fast-track are all chasing similar strategies, there may also be systemic risks”, she said.

“All of this will need to be considered in how TPR sets the parameters within the fast-track framework and the governance to keep them under review as financial conditions change. Setting ranges for certain parameters could help manage potential volatility.”

Calls for extra trustee statement

Hymans’ response advocated an additional statement for trustees “levelling down” to explain their actions with modelling requirements to prevent them from “falling asleep at the wheel”.

Meanwhile, some breadth in parameters should me maintained to smooth out volatility. The company recommended that Government Actuary Department modelling for funding levels should be updated to consider alternatives to buyout, such as commercial consolidators, and offered some support to recent House of Lords suggestions that open schemes should be treated differently to closed ones.

The consultancy remained supportive of the regulator’s aims in setting up a twin-track approach, saying the flexibility afforded by the bespoke option would be vital “for schemes with atypical covenants and contingent support in place”.

“TPR’s enforcement must not evolve in such a way that this undermines the scheme-specific nature of the bespoke route, and requires all schemes to fund to fast-track equivalence,” Ms McLaren said.

But she added: “Forcing trustees and sponsors to agree a purposeful plan to get their scheme to run-off prevents schemes optimistically drifting in the hope of better funding. Many well-run schemes have been doing this for some time already.”

Ship has sailed on open schemes

The regulator declined to comment on Hymans' concerns, as it has a policy of not responding to individual consultation responses.

Responding to the range of criticism offered of the consultation, Isio partner Mike Smedley said that some arguments hold more merit than others.

"Some have suggested that the code will make trustees less prudent or give the sponsor some unwelcome influence, but these concerns are hugely overstated. Trustees don’t act like lemmings and they will continue to make decisions in the context of their scheme and the right long-term objective for them," he said. "Equally, trustees working hand-in-hand with sponsors is already de rigueur among well-run schemes.  For schemes that might be less well-run, the whole point of the fast-track regime is to provide a minimum standard that the Regulator has approved."

He also said criticisms of the code's potential impact on open schemes were misplaced, given that "in reality that ship set sail with the Pensions Act 1995, which guaranteed pension promises from employers".

"Clearly schemes with the appropriate protections – for example government-backing – will be able to justify running high levels of risk indefinitely, but generally the regulator’s code is simply the tail following behind the dog, not wagging it," Mr Smedley said.

There are, however, open questions around how the regulator will balance member security and sponsor affordability in its setting of fast-track limits, and whether the bespoke regime will simply mirror these expectations.

"There’s a difficult balance between prescribed rules and allowing genuine differences to reflect scheme circumstances. This leads to concerns, from larger schemes and sponsors with more sophisticated approaches, that key aspects of the code could be quite ‘one-size-fits-all’," Mr Smedley said.