Nigel Cayless looks at TPR's proposed funding regime and whether a more objective approach is on the way
Under The Pensions Regulator's (TPR) proposals for the future of defined benefit (DB) funding, scheme trustees will be able to choose either a "fast track" or "bespoke" approach to their schemes' valuations. As the more straightforward (and prescriptive) approach, the fast track will only be available to schemes whose valuation meets objective and quantitative compliance guidelines and parameters, covering key aspects of funding and investment arrangements.
Under the fast track approach, trustees can expect minimum regulatory involvement. In contrast, the bespoke approach may mean more scrutiny, but will offer greater flexibility. Schemes will be able to switch approaches from valuation to valuation, as appropriate.
Under both routes, trustees will have to submit evidence to the regulator (to a greater degree when using the bespoke route) demonstrating their approach to managing their funding and investment risks as part of the new statement of strategy being introduced by the Pension Schemes Bill.
A clearer and more enforceable code
Earlier this year, TPR launched a consultation on the first stage of introducing a new DB funding code. This follows a number of high-profile scheme failures, the government's 2018 white paper "Protecting Pension Schemes", and the Pensions Schemes Bill (which is still making its way through parliament). This first consultation, which has just closed, sets out the regulator's proposals for a clearer, more readily enforceable funding framework. The second consultation, due next year, will focus on the new draft code itself. The new code is currently expected to come into force "late 2021 at the earliest", and is likely to have a significant impact on how trustees (and their advisers) approach actuarial valuations in the future.
In addition to the new twin-track approach, TPR's consultation also identifies a number of overarching principles which it believes should stand behind all scheme valuations. Among other things, these principles reiterate the focus we have seen elsewhere from the regulator on long-term objectives and reducing reliance on the employer covenant over time.
The regulator does not expect its "new proposed approach to be too onerous for most schemes to implement", but appreciates that "there could be significant impact for some schemes, particularly those that have been running excessive and unjustifiable levels of risk".
Fast track guidelines
Some commentators have already questioned whether a standard approach to valuations would have stood up to the fallout from the global pandemic we have seen over the last few months. This has led to calls to rethink the consultation based on arguments that it was written in different, more benign, economic conditions and is now out of step. The regulator has responded by confirming that it intends to continue with the consultation, saying that "the issues the consultation raises are even more important and relevant in the light of Covid-19".
It has also confirmed that, when it consults on where the fast track's objective and quantitative compliance guidelines and parameters should be set, it will have regard to prevailing market conditions (particularly in light of the ongoing pandemic) and the DB scheme landscape at that time.
The regulator has stressed that the bespoke route is not an "opt-out" from the new regime but is intended to complement the fast track, with both applying consistent methodology for legislative compliance. Depending on the proportion of schemes that end up using the bespoke route, this increased oversight could potentially result in a significant burden on TPR's resources. It is also arguable that, in some cases, this degree of oversight isn't strictly necessary (for example, if the reason for choosing the bespoke path is that a scheme is pursuing a more sophisticated funding strategy than would otherwise be permitted under the fast track).
As noted above, this first consultation focuses on the regulator's proposed approach to the new funding code (rather than the new code itself). As such, much of the detail is yet to come. It will be interesting to see how the introduction of what looks like a more objective approach by TPR to scheme funding will fit with what (under the legislation at least) is ultimately a scheme-specific (and therefore subjective) funding regime. Scheme actuaries will also have a keen eye on how use of the fast track will fit with their various obligations under the scheme funding legislation. It also remains to be seen how this new approach will translate into regulator involvement in scheme funding discussions and, ultimately, possible enforcement action.
Nigel Cayless is associate director at Sackers
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