The industry has responded with ‘disappointment’ at The Pensions Regulator’s (TPR) an interim response to its first defined benefit (DB) funding code consultation, which one consultant says is ‘light on detail’.
The response sets out how new principles would be applied in practice through the proposed twin-track regime (Fast Track and Bespoke).
The PLSA says it is ‘disappointed’ the feedback paper has not clarified some of the misunderstandings about the report. Barnett Waddingham has accused the report of being ‘light on detail’ as to the regulator’s direction of travel.
Aon expressed disappointment at the potential extra contribution costs on employers in the event of investment underperformance because of the requirement to meet fixed date targets.
The response highlighted industry feedback flagging risks associated with where Fast Track guidelines would be set – such as some schemes ‘levelling down’ and an increase in the cost of DB pension provision for others.
Concerns were raised over proposed Fast Track guidelines for open schemes, potential loss of flexibility, such as through benchmarking the Bespoke route against Fast Track), and an increased evidential burden if choosing to submit a Bespoke valuation.
Some respondents were also concerned the Bespoke route may be perceived as being ‘second-best’, and a reliance on covenant being watered down and what a greater trustee focus on covenant visibility would mean for schemes’ ability to rely on covenant beyond the medium term.
TPR says some of the concerns that were raised stemmed from misunderstandings around what it had proposed, and says it will clarify these in its communications and during the second consultation.
It has provided some clarifications on the open schemes issue in a recently published blog . .
The interim response highlights how there were 127 responses to the consultation across a broad range of stakeholders, generating 6,000 comments in total. Overall, there was general support for the principles and regulatory approach proposed in the consultation, says TPR.
TPR’s second funding code consultation in the second half of 2021 will include a full summary of te responses to its first consultation.
It will also include the draft code of practice for consultation and its proposed regulatory approach, including developing thinking around its process to review and update Fast Track guidelines, its approach to assessing valuations, engagement with DB schemes, enforcement and an impact assessment and supporting analysis.
TPR executive director of policy David Fairs says: “Our first consultation was complex and we are grateful for the well-thought-out responses. We are now working through the issues raised from more than 6,000 comments received. We will be developing our Fast Track guidelines while taking into account the very challenging current economic conditions, and we will carefully assess any potential impacts.
“Our revised code of practice has to be consistent with new legislation, so we will have to wait for the passage of the Pension Schemes Bill through Parliament and DWP’s consultation on draft regulations, currently expected to be in the first part of this year. We therefore anticipate publishing our second consultation in the second half of 2021.”
PLSA head of DB, LGPS and investment Tiffany Tsang says: “We are glad that the Regulator is listening, as the industry has raised some fundamental concerns about the impact of many of the proposals put forward last year including being too prescriptive in a number of key areas, the lack of clarity and interaction between the bespoke and fast-track approaches and the need for the differing circumstances of open schemes and closed schemes to be more fully recognised. We look forward to discussing more detail of the regulator’s thinking in the coming months as it continues to assess and update its approach to reflect both the very different times in which schemes and sponsors are operating and also the detailed concerns that have been raised.
“However, it is slightly disappointing that the publication does not clarify further – at this time – some of the misunderstandings the report notes have been made about the proposals. We now look forward to continuing our work with TPR on this in order to achieve the best possible outcomes for our members and, in turn, savers.”
Barnett Waddingham head of pensions research Tyron Potts says: “The interim response is very light on detail regarding the regulator’s expected direction of travel, giving us little more to go on. Nevertheless, since the first consultation TPR has been open in commenting publicly about the expected development of the new regime and so trustees and sponsors will already have a firm idea of their long-term funding objectives and end-game journey plans.
“Our analysis shows that most well-run pension schemes will be able to continue current plans under TPR’s new regime without a need for dramatic changes.
“Barnett Waddingham and others have highlighted specific cases where more detailed solutions are needed, which the regulator has rightly noted in this interim response. These include the treatment of open schemes under the ‘Fast Track’ approach and concerns that a ‘Bespoke’ compliance route could be seen as a second-best option if not framed properly. We urge the regulator to ensure that the economic lessons of the ongoing pandemic are learned and reflected in the new code. We therefore look forward to continuing our dialogue with TPR as part of the next consultation later this year in order that a robust, flexible and fit-for-purpose regime results.”
Aon partner and head of UK retirement policy Matthew Arends says: “While it’s positive that TPR is taking on board the comments made by the industry in response to the first consultation, I am disappointed that in its interim response it has not called out one of our key concerns with the first consultation – the additional costs on UK plc arising from TPR’s intended approach to long-term targets. This arises because TPR expects all schemes, whether they adopt Fast Track or Bespoke compliance, to reach their long-term target by a fixed date – which will depend on each scheme’s maturity.
“The consequence of this, is that the scheme sponsor will need to make extra contributions if investment underperformance occurs. That will be the only way they have available to get back on track for the target date – and it represents a commitment most sponsors do not currently have.
“Corporate cashflows are finite, so additional cash to meet long-term pension targets means less available to spend on employees and investment in the business. Conceivably, this might mean less is available for DC savings for employees, as a result of having to support a fixed long-term target date for DB pensions. Is that inter-generationally responsible?”
Hymans Robertson partner Laura McLaren says: “Given the tone of TPR’s response, it seems unlikely the key principles underlying the new code are set to change fundamentally. However, there is some welcome reassurance that TPR will address the concerns raised by respondents.
“In particular, many trustees and sponsors will be comforted that both Covid-19 and post-Brexit recession risks will be factored into where the final Fast Track parameters are pinned down. Given the challenging developments since the consultation was published there has been a growing sense that these would need to be set more flexibly so Fast Track remains an achievable target for most schemes, at least in the short term.
“It is also encouraging that TPR will address calls for more detail on what will be acceptable under the Bespoke track and the supporting evidence needed. Our hope is that this will address widespread concerns around the potential overreach of the Fast Track regulatory approach, and TPR’s enforcement evolving in such a way that this might undermine the scheme specific nature of the Bespoke route. We see the flexibility offered by Bespoke as essential for many schemes.
“At this stage the interim response doesn’t offer much in terms of specifics. Those will come in the second consultation which TPR has confirmed it will not be launching until the second half of 2021. Although TPR indicates it will continue to communicate over that period, given the lengthy build up, some may have hoped for this sooner rather than later. Certainly, pension schemes which are due valuations this year will have the challenge of navigating this ongoing regulatory uncertainty. Any further delays to timings may run the risk of stifling decisive action from trustees and sponsors in the meantime.”