XPS Pensions has warned that mature schemes could see deficits double without a transition period under The Pensions Regulator’s (TPR) proposed ‘fast track’ funding rules.
The consultant revealed that while it supports the regulator's proposed principles to regulate the expected changes to government rules on long-term funding strategies for pension schemes, key additions are needed for both approaches.
While XPS understands the use of a fast track approach and TPR's proposals - laid out in its consultation closing today (2 September) - it said the approach should have a transition period for mature schemes to allow them to benefit from the advantages of the fast track approach from the outset.
These advantages include lower fees and increased regulatory efficiency.
The consultant's response to TPR's consultation also noted that a different approach may be needed for how the watchdog will assess schemes using the ‘bespoke' route. It suggested that current proposals "link the assessment of bespoke approaches too closely to fast track, potentially denying true flexibility".
XPS suggested the regulator should initially review bespoke valuations using only the work already done by trustees and employers to develop their statement of strategy. "While understanding risk is a crucial part of this statement, we do not think that risk should have to be assessed relative to the fast track benchmark," the firm explained.
XPS senior consultant Stephanie Cole said: "The proposed framework will require schemes to be fully funded against a long-term objective by the time they are significantly mature. There are a number of schemes already at this point. Despite being prudently funded now, these schemes could see deficits increase by 50% under the new proposals (or even double at the top end of targets in the consultation)."
She added: "At the same time, such schemes may need to undertake substantive de-risking exercises to ensure compliance, potentially forcing them into selling assets at a time of market uncertainty. We think some schemes in this position, especially smaller schemes, should still have the option to take advantage of the benefits offered by the fast track approach.
"The best way to resolve this would be to introduce a minimum transition period of six years before schemes' funding targets must be set at the new long-term objective."
Cole continued: "We don't think trustees who follow a bespoke route should have to carry out a separate piece of work to reconcile all parts of their approach to the fast track standard. We believe this would add unnecessary cost and isn't appropriate given the wide range of potential bespoke approaches that could be appropriate."
A second consultation focused on the draft code itself is due later this year.
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