Revised DB code emphasises integrated risk management

The code urges trustees and employers to consider the impact scheme funding proposals may have on the employer’s plans for sustainable business growth, according to the regulator.

For a lot of schemes it is not a wholesale change to the approach they might be taking anyway

Alison Fleming, PwC

Hugh Nolan, chief actuary at JLT Employee Benefits, said that although the code is not much different from its predecessor it may lead to some employers taking a harder line on funding.

“The employers might be saying to the trustees, ‘We now don’t think that plan you are putting forward is right because we want sustainable growth for our employer’s business,’ and the regulator may find it hard to step in if they wanted to do so,” he said.

The new code also put an emphasis on proportionality. “Trustees should act proportionately in carrying out their functions given their scheme’s size, complexity and level of risk,” the code stated.

Nolan said the regulator is trying to be sensible about how many schemes they can report on.

“It is slightly worrying, that they have actually given a bit of a green light to smaller schemes to pull a fast one… the regulator has quite clearly signified it will look at bigger cases,” he said.

Trustees will also be expected to take an integrated approach to risk management.

The code stated: “If they are not doing so, trustees should adopt a proportionate integrated approach to risk management when developing an appropriate scheme funding solution.”

Such an approach should look at the risks associated with employer covenant, investment and funding.

The code stated that trustees should understand the risks across all these strands and define acceptable parameters for each. This is expected to be in place by their 2014 valuations.

Alison Fleming, a director in the pensions team at consultancy PwC, said the new code is about taking a more comprehensive view of risk within the pension scheme and “thinking about the covenant of the business and whether that can support the investment risk the scheme is running and ensuring that links to the funding strategy of the scheme”.

She said schemes and employers will have to work much more closely together and take a much more risk-focused approach.

According to a survey by the consultancy, only around a third of schemes already have a formal strategy in place which brings together funding, covenant and investment.

“For a lot of schemes it is not a wholesale change to the approach they might be taking anyway, but I do think it is a change for some schemes,” Fleming added.