The Department for Work and Pensions (DWP) has today started a fresh consultation on steps to strengthen protections for participants in defined benefit (DB) pension plans.
Under the new proposals, all schemes will need to set out their ‘long term plans’, for example, to buy out their liabilities with an insurer, to run on with ‘low dependency’ on sponsor support, or to transfer assets to a pension superfund. Additionally, all schemes will need a ‘journey plan’ to get to their long-term objective, based on a realistic assessment of the ‘covenant’ or financial support provided by the sponsoring employer in backing the scheme
LCP partner Jonathan Camfield says: “These regulations mark a welcome milestone in the long and winding road towards a new framework for the funding of DB pension schemes. The world has changed a great deal since these ideas were first proposed and we welcome the fact that consideration has clearly been given to this, as well as concerns raised by the industry. But we are still some way from a finished product.
“Once these regulations have been finalised, the way will then be clear for TPR to publish its second Funding Code consultation which will show in detail the extent to which Government and Regulators have listened to industry concerns about the potential rigidity of what was proposed. Trustees and sponsors should already be preparing for this new world, with a particular focus on long-term journey planning and a deep understanding of the strength of the ‘covenant’ of the sponsoring employer. Nonetheless, today represents an important step forward”.
Hymans Robertson partner Laura McLaren says: “Today’s long-awaited consultation launched by the DWP into regulations underpinning the new defined benefit funding code is an important step forward. After numerous delays, notably it is expected to pave the way for the Pensions Regulator to launch its second consultation into the Code of Practice later this year. That keeps plans on track – at least for now – for the Code to launch in late 2023.
“Following Royal Assent on the Pension Schemes Act 2021, this ‘secondary’ legislation starts to flesh out more on the new rules and establishes where the Regulator will be able to step in if a scheme is falling short of the legal requirements. However, the draft regulations don’t offer a great deal more in terms of specifics than had previously been signposted in consultation to date. Largely sticking to pinning down the key principles, there isn’t anything in the draft legislation about Fast Track and Bespoke arrangements, and nothing confirming the specific Fast Track parameters. All of that is left for the Code of Practice.
“The Pensions Regulator has announced it will be launching the draft Code of Practice in the Autumn after seeing DWP’s draft regulations. Given the draft regulations and tone of the Regulator’s responses to date, this looks unlikely to change fundamentally. There is some welcome reassurance that concerns raised by respondents are being addressed. In developing the draft Regulations, DWP note they have aimed to ensure they will not unduly constrain open schemes. The Regulator has also been keen to address widespread concerns around scheme-specific flexibility in the Bespoke route.
“Given the developments since the first consultation was published, most will be watching to see where the final Fast Track parameters are pinned down. The draft regulations confirm that the maturity of a scheme will be measured using a duration of liabilities but, for now, leaves the point at which a scheme is deemed ‘significantly mature’ to be defined by the Code. Similarly, the regulations include a principle that funding deficits should be recovered as soon as the sponsoring employer can reasonably afford, but stop short of defining any more clearly what is appropriate in the context of a recovery plan length or structure. Definitions of a ‘low dependency’ investment allocation and funding basis stick to principles rather than putting figures to these.
“Whilst DWP and TPR take time to get the changes right, trustees and sponsors will continue to need to prepare funding valuations knowing that new rules are coming down the line. However, as the final details start to be pinned down, these should help those agreeing funding plans in 2022 and 2023 better understand how they are likely to work with the new code coming in 2025 / 2026.”
Cardano Advisory managing director Alex Hutton-Mills says: “DWP’s new regulations put a covenant on a formal footing as the foundation of all DB pension strategies; but the focus on a low dependency funding position could be a step change in how liabilities are measured.
“The risk for sponsors is that higher funding targets (and trustee prudence) further complicate decisions on the use of the “marginal pound” at a time when management will be focussing on investment and liquidity decisions to ride out the current macroeconomic turbulence. Robust and specialist challenge of trustee covenant assessments will become essential, with wider adoption of creative solutions to protect schemes whilst preventing overfunding.”
Pensions Management Institute director of policy and external affairs Tim Middleton says: “There are 10 million people with benefits retained in DB pension schemes, and it is as important as ever to ensure that funding regulations ensure that trustees do everything possible to protect members’ pensions.
“These new standards bring greater clarity to trustees as to what is expected of them and also improve security for members. Trustees are better now able to give greater focus to long-term planning and to manage risks more effectively. This is a welcome development that will give greater confidence to members about the management of DB schemes.”
Broadstone technical director David Brooks says: “We finally have the regulations to back up the requirement for schemes to prepare a Funding and Investment Strategy with their actuarial valuation. We have long lived with the concept of this statement and so it all feels oddly familiar.
“The detail of the consultation covers much of what we already knew or surmised. Schemes will need to set a date from which the risk to members’ benefits is at a minimum. In general, investment risk is curtailed and it is re-emphasised that sponsor covenant must be monitored and understood.
“The question remaining for trustees and sponsors is whether this funnels schemes too fast and too hard by removing the upside opportunities of holding growth assets for longer. The Pensions Minister is at pains to point out that this isn’t a one size fits all approach.
“However, the DWP will be leaving a good proportion of the detail to The Pensions Regulator who have promised to consult on their code in the Autumn. It is here that the devilish detail may yet emerge.”