DB funding rules should be 'sent back to the drawing board'

WTW says there is too much prescription in a supposedly principles-based framework

Jonathan Stapleton
clock • 3 min read
WTW head of retirement, Great Britain, Rash Bhabra
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WTW head of retirement, Great Britain, Rash Bhabra

Draft regulations on defined benefit (DB) pension funding would impose a narrow, simplistic and overly rigid framework on schemes and should be sent back to the drawing board, WTW says.

In its response to the Department for Work and Pensions' consultation on DB funding rules, the consultant encouraged schemes to make their concerns known to the DWP ahead of the deadline next week - and noted it had also written to ministers at both the DWP and HM Treasury to underline its main concerns.

WTW head of retirement, Great Britain, Rash Bhabra said: "The seed from which these new regulations have grown was first planted in 2018, when the government acknowledged that the existing scheme-specific funding regime works well for most schemes but sought to make it easier for the Regulator to police the minority.

"Prioritising enforceability above all else has meant inserting too much prescription into what was supposed to be a principles-based framework. There is little flexibility around the ‘low dependency' positions that schemes must target, nor around how quickly they must get there. One-size-fits-all low dependency targets could crowd out investment in infrastructure and other secure income asset classes, concentrating investments - and the associated risks - in gilts and credit that target very low returns."

Bhabra said that, for some schemes, the regulations will also increase how much the sponsor needs to contribute over the next few years - potentially detracting from the government's growth agenda where contributions displace investment in the business or making it more likely that the sponsor terminates further benefit accrual.

He added: "Long-term funding plans that have been painstakingly agreed between trustees and sponsors could have to be reopened when the measure of how mature a scheme is moves around with market interest rates: there are schemes who would have seen their date of ‘significant maturity' come forward by seven years during the past 12 months.

"In other policy areas, the government has shelved proposals that it inherited. These pension funding regulations should also be sent back to the drawing board. The next iteration should retain the aim for all schemes to have clearly articulated funding and investment strategies with an appropriate focus on the longer term, but should recognise that less nuanced approaches may prove less robust."

WTW's intervention comes just days after Lane Clark & Peacock (LCP) also urged the government to reconsider its "rigid" new rules on pension scheme funding - saying they could unnecessarily cost businesses and members up to £30bn, affect the government's growth agenda and bring 200 employers to the brink of insolvency.

LCP partner Jonathan Camfield said: "The result will be an unnecessary hike in the amount of money employers are expected to put into pension schemes, to the detriment of their ability to invest in their own future. And for some employers, these increased demands could be the final straw which pushes them into insolvency.

"At a time when there is so much focus on economic growth and boosting business investment, this does not look like joined up government. The DWP needs to re-write these rules to strike a better balance between security for pension scheme members and avoiding unnecessary burdens on the employers who stand behind them."

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