The Pensions Regulator Funding Code Update

Pensions

Isio responds to the TPR Funding Code Update

Iain McLellan, Head of Research and Development at Isio, commented:

“The Pensions Regulator publishing its Code of Practice on the new funding and investment regime for DB schemes feels like getting to the end of the regulatory tunnel. We are encouraged to see that the Regulator (and the government in drawing up final regulations) has been willing to listen to industry concerns and smooth some of the new regime’s harder edges.

These welcome changes can be clearly seen throughout the final Code in the shift away from fixed rules and back towards a principles-based approach. This should allow trustees and scheme sponsors the flexibility to properly reflect their scheme’s particular circumstances in their funding and investment plans. In particular, we are pleased to see a more pragmatic stance on investment strategy, employer covenant and open schemes.

However, we are not fully clear of the tunnel just yet. We are still awaiting updated employer covenant guidance and the final format of the statement of strategy – a new document trustees will need to put together during the valuation process. So, there are still some a few more steps on the journey to take, but hopefully the Regulator will adopt a pragmatic approach when considering the first valuations under the new regime as a result of the short implementation period for the final rules.

The totality of the changes being introduced by the new Code remains complex. Although they have been hearing about it for a very long time now, trustees and sponsors will now have to step into the light and start figuring out whether any gremlins remain.”

FAQs

The key changes to the draft code are:

Significant maturity has been set at 10 years – which will give schemes longer to reach a low dependency position. This reflects the shift in market conditions since the previous consultation and the move for greater certainty in the regulations by using a fixed date for the calculation of duration for this assessment.

Clarity that you don’t have to invest in line with the low-dependency investment strategy they set out – confirming that actual investment strategy won’t be constrained. This reflects changes made to the final regulations. Although TPR would expect the target and actual strategy to be aligned in most cases, this should help to ease concerns

Adopting a principles-based approach to assessing ‘highly resilient’ – removing the prescriptive (and complex) approach in the previous draft. While trustees will still have to be satisfied that their low-dependency strategy is highly resilient they will be able to better reflect their own circumstances and approach.

Allowing for scheme-specific risk taking along the journey plan – moving from a maximum supportable risk formula to a principle-based approach. While TPR still wants trustees to understand downside risk and whether this is affordable, they have recognised that a single formula was too simplistic and could ultimately lead to poor risk management by focusing on good formula management.

Introducing a new section on open schemes – to reflect allowance for the different features of these schemes. These changes follow on from greater flexibility being introduced in how to allow for ongoing benefit accrual and new joiners in the calculation of maturity.

Greater clarity on assessing employer covenant – including removing the concept of covenant visibility. The changes reflect the final regulations and also provide TPR’s expectations on covenant reliability and longevity periods.

Clearer expectations on proportionality – to help stronger, less complex and less mature schemes to comply. TPR has provided guidance on proportionality of compliance to reflect that these schemes may not need to do as much detailed analysis compared to others.

Contacts

Iain McLellan

Director

iain.mclellan@isio.com See full profile

The Pensions Regulator Funding Code Update

Pensions

Isio responds to the TPR Funding Code Update

FAQs

Contacts

Isio Insight