The Society of Pension Professionals (SPP) has called on The Pensions Regulator to simplify its draft funding code, saying the new rules are ‘over the top’, will put undue burdens on schemes and drive up costs.
It says the code, as it stands, is disproportionate, with rules designed to address a small number of cases, where risks were not being properly managed, now applied to the vast majority of DB schemes. This, the SPP says, places an unnecessary compliance burden on these schemes. In its review the SPP highlighted the following issues:
- The proposals will force all schemes to carry out detailed integrated risk management strategy planning at each valuation, regardless of their circumstances.
- Schemes will be required to reach agreement on a journey plan with the employer, to include the documentation of various details relating to covenant metrics and investment strategy – both now and many years into the future.
- Actuaries will also need to consider whether the scheme meets the Fast Track tests – a new concept designed to help TPR focus its resources.
This extra work will inevitably mean an increase in costs for schemes. Getting external covenant advice will become a necessity in most cases, and schemes will also incur additional actuarial and investment advisor costs at future valuations.
SPP president Steve Hitchiner says: “The original intention of the new funding regime was to address a small number of cases where risks were not being appropriately managed, but these proposals are over the top in a world where surpluses are more common than deficits, and schemes are approaching the insurance market in record numbers.
“Much of TPR’s thinking is sound risk management, and helpful guidance, but its proportionality for all schemes is questionable.
“TPR’s own analysis shows 51 per cent of schemes will pass their Fast Track tests without any change – and so are considered low risk by TPR. This increases to almost 60 per cent if we exclude those that fail because of the length of their deficit recovery plan, which will normally be due to reasonable affordability constraints. Many more will be close enough that they can meet the tests with a few minor strategy adjustments. Nevertheless, all these schemes appear to be subject to largely the same compliance burden, pushing trustees towards box-ticking rather than thinking through the underlying risks of their specific circumstances.
“TPR should consider how the code can be simplified to target those schemes posing greater risk, without placing an additional compliance burden on the majority who are already well funded with low risk strategies.”