'True flexibility' in bespoke DB funding code proposal questioned

The true level of flexibility for defined benefit (DB) schemes that take the ‘bespoke’ option laid out in the proposed DB funding code needs further clarification, the industry has said.
The true level of flexibility for defined benefit (DB) schemes that take the ‘bespoke’ option laid out in the proposed DB funding code needs further clarification, the industry has said.
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The true level of flexibility for defined benefit (DB) schemes that take the ‘bespoke’ option laid out in the proposed DB funding code needs further clarification, the industry has said.

The first tranche of the funding code consultation was published in early March and set out The Pensions Regulator's (TPR) expectations for the future of DB scheme funding. The consultation was the extended following the spread of Covid-19 and the ensuing economic impact on the industry.

Key within the code is the requirement for schemes to have a sustainable long-term funding strategy, with the proposed twin-track approach of either a fast track or a bespoke route allowing trustees a higher degree of flexibility.

A July poll of Society of Pension Professionals (SPP) members found only 7% feel true flexibility will be offered to schemes that choose the bespoke route. Alongside this is a concern that too many schemes will choose this option, potentially skewing TPR's ability to manage funding effectively.

The SPP said: "There is a great deal of uncertainty of how the new funding code will work in practice, particularly the calibration of the fast track assumptions and how bespoke the bespoke route will be."

More than half (57%) of SPP members said they anticipated the bespoke route to be "essentially fast track" rather than truly bespoke.

The SPP said: "There is a fine balance for TPR here: to meet the needs of employers and trustees where full flexibility may be appropriate because of the circumstances of their scheme, and to provide a clear mechanism for TPR to monitor and take action where they believe the funding approach to be inappropriate."

More than a third (35%) of respondents - the largest proportion - also said they expected between a half and three quarters of schemes to take the bespoke route. A quarter expected 25-50% of schemes to choose the option, while 16% it was likely to be the most attraction option for more than three quarters of their schemes.

The SPP added: "Interestingly, this is despite the majority of respondents believing that the bespoke approach is not truly bespoke. This may stem from the fact that the fast track proposals are far from current industry behaviour."

Three quarters (74%) of respondents told the SPP that TPR only needed to be ‘somewhat' prescriptive over the assumptions for a fast track compliance regime, ahead of 7% who wanted to see every assumption defined.

"This is good news for both schemes and TPR, as it presents a compromise between reducing advice costs and possibility of ‘gaming the system' and providing sufficient flexibility," the SPP said. "TPR will still need to carefully draw the line between ‘key' and ‘scheme-specific' assumptions, as this is likely to be the single most important decision on how many schemes it will end up having to scrutinise under the bespoke rule."

The SPP said that its research overall showed a clear industry expectation that around half of schemes will go down the bespoke route, potentially creating a challenge to the central premise of the new code in that it allowed TPR to target its resource on a small subset of schemes.

The SPP said: "TPR has a very fine balance to strike between setting fast track assumptions at a sufficiently prudent level (requiring only limited regulatory scrutiny) and setting them such that the significant majority of schemes elect to go down the fast track route.

"Only time will tell whether this balance is struck."

Association of Consulting Actuaries pension schemes committee chair Peter Williams agreed: "We need to see details on how the bespoke option will work in practice to be confident in the new regime.

"It is important that the current scheme specific funding flexibility is maintained, as this must be balanced with the needs of supporting the sustainable growth of UK employers." 

TPR has continued to issue guidance to trustees throughout the coronavirus pandemic regarding funding of DB schemes, with executive director for regulatory policy, analysis, and advice David Fairs initially stating schemes had faired well under economic pressure.

In a Professional Pensions column last week, Fairs said: "When we launched the consultation, no-one could have predicted how our world would change in the coming months. Subsequently, some in the industry questioned whether we should postpone or even abandon the exercise.

"We extended the deadline for responses by three months to make sure industry has more time to engage with the consultation, but we think it is important to continue with this first stage in our consultation.

"If anything, I believe the issues being looked at are even more important and relevant in the light of Covid-19."

The regulator will hold a webinar on the DB funding code today (13 August) ahead of a closing date of 2 September for industry feedback on the consultation.

Read more from David Fairs here: DB funding code: It's a matter of principle

 

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