The Pensions Regulator and Department for Work and Pensions need to “resolve inconsistencies” between the new DB code and the regulation underpinning it to avoid “negative consequences” for schemes and their members.
This was the stark warning given by consultants Hymans Roberston, as it suggests potential changes to keep compliance proportionate to risk to support schemes and their members.
To illustrate potential inconsistencies Hymans has published a number of case studies that focus on the consequences that could rise if these problems are not ironed out in the final regulations.
It says there are particular issues around calculations of maturity and the format of the statement of strategy.
Hymans Robertson partner and head of AB actuarial consulting Laura McLaren says: “TPR still has to finalise details that could prove important in how successfully the code works in practice. The rigidity of the DWP regulations and shortcomings in the code could lead to unintended negative consequences for many schemes.”
She says in recent months, concerns have grown over the impact of this new regime on open schemes. Neither DWP nor TPR has yet responded to industry concerns about what it will change to address these issues.
Hymans says the latest government proposals to encouragement the pension industry to invest more in productive assets – announced in the Chancellor’s recent Mansion House speech – is a potential further shift in direction that the new regime needs to reflect.
McLaren adds: “TPR has already nudged schemes a long way, so most have adopted good practice anyway. Many schemes are well-funded, de-risked and already on the path to buy-out, so we think most won’t fundamentally change their plans as a result of the new code. It would therefore be disappointing if the code distracts focus or disrupts well planned scheme-specific approaches because it’s not flexible enough, or because it adds a compliance burden that outweighs any long-term value.
“The code seeks to bring a minority of schemes into line with good practice – but does so at the risk of constraining schemes already doing the right thing and adding an unnecessary layer of compliance. TPR must find the delicate balance that enables all schemes to thrive.
“DWP and TPR must get the detail right. There are lots of moving parts, and the clock is ticking if TPR want to avoid yet more delays.”
Hymans Robertson’s published case studies reflect TPR’s latest proposals for the DB funding code, coming into force for valuations from 1 April 2024. The industry expects TPR to announce the final regime later this year, when it will set out how it has taken account of feedback and changes to the DB pensions landscape, including funding improvements and sentiment on issues such as open schemes.
Hymans says that DB trustees and sponsors should use the examples as a guide to the issues their schemes might face, and to identify potential challenges ahead, particularly for schemes with valuations next April who need to start preparing for when TPR’s code comes into force.