11 October 2019

Important changes to the scheme funding regime were heralded eighteen months ago by the DWP White Paper and followed up in March 2019 by the Pension Regulator’s 2019 Annual Funding Statement. With no immediate sign of the promised consultations on the revised code of practice on DB funding, what approach should trustees and employers take to scheme funding?

Background – what changes were proposed to the scheme funding regime?

The 2019 Annual Funding Statement continued in earnest the process of developing the scheme funding regime along the lines which had been outlined in the DWP’s 2018 White Paper 'Protecting Defined Benefit Pension Schemes'. The White Paper outlined high level proposals to make the scheme funding regime clearer for trustees and employers and easier for the Regulator to enforce. In particular, it was suggested that greater clarity would be given on:

  • how trustees should demonstrate prudence when calculating liabilities
  • the appropriate factors to balance when agreeing a recovery plan
  • the steps to take to ensure that a long-term view is adopted when setting a scheme’s statutory funding objective.

It was suggested that all of the above would be set out in a revised code of practice on scheme funding. In May 2019 the Regulator announced that it expected to issue two consultations on the revised code, one in summer 2019 (on the outline of a clearer framework for DB funding) with a more detailed consultation to follow in 2020. To date, no such exercise has begun. 

The consultations (in particular the second one) can only realistically be prepared once the Regulator has a clear view from the DWP on the relevant parts of the Pensions Bill and associated draft regulations. Therefore, it seems quite possible that the current political environment will push the consultations well into 2020, with the knock on effect of the revised code not coming into force until 2021. Indeed, given the current climate we’re far from certain that the Pensions Bill will even feature heavily on the Queen’s Speech on Monday.

This is potentially a very frustrating position for trustees, employers and indeed the Regulator itself. It is clear the Regulator believes that in the past some trustee boards have not set their technical provisions 'prudently' and that agreed recovery plans have not always been 'appropriate'. Trustees are on notice that the revised code will set much clearer parameters for what is 'prudent' and 'appropriate', along with a legal obligation to comply with parts of the code (and sanctions for failing to do so). However, there is not yet even a consultation on what those parameters will look like, leaving trustees a little in the dark in these areas.

What approach should trustees and employers take in the meantime?

Despite the lack of certainty in the legal framework there is a clear direction of travel and it is helpful that the Regulator has already been explicit about its expectations in certain key areas. In particular, trustees and employers should take account of:

  • Long-term funding targets – both the annual funding statement and the Regulator’s involvement with schemes this year push the importance of setting sensible long term funding targets and, more importantly, focussing more on how that target is likely to be met (whilst balancing all of the risks involved in scheme funding). An interesting development is a significantly renewed focus on contingent assets as part of the long-term funding solution
  • The shape of recovery plans and reliance on employer covenant – including length of recovery plans and 'fair treatment' of pension schemes. The Regulator is already fulfilling its promise that up to 1,000 schemes will feel the 'gentle hand' of enhanced supervision under its new 'regulatory initiatives', including in relation to scheme funding issues such as inappropriate length recovery plans and concerning dividend payments. We have also seen a significant increase in focus on employer covenant, in particular where trustees have not obtained an independent covenant assessment.

When will the position become clear?

It’s still 'watch this space' for the moment. As well as combing through the Queen’s Speech on Monday we’re looking forward to see if any firm announcements are made at the PLSA conference later in the week. Do come and see us at stand 500 to discuss the latest news (or lack of it!) on this important topic for trustees and employers.

Key contact

Richard Pettit

Richard Pettit Partner

  • Pensions Regulatory
  • Pensions Services
  • Pensions in Northern Ireland

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