TPR's David Fairs
Pension schemes have called for additional funding code flexibilities, especially as they reach the point of significant maturity.
In a panel session poll at the Pensions and Lifetime Savings Association's annual conference in Liverpool yesterday (12 October), delegates said one issue that would be particularly important for the regulator to get right concerned what happened when a scheme reached "significant maturity".
This is the point at which schemes will be mainly pensioner only and funded and invested so that no further employer contributions would be required to fund the benefits accrued by members.
When schemes reach this point, they will be required to invest in a low dependency strategy that cuts investment risk.
Delegates particularly voiced concerns that the provisions of the funding code could lead to trapped surpluses.
Speaking on the panel, The Pensions Regulator (TPR) executive director of regulatory policy, analysis and advice David Fairs said he had also been hearing a lot of feedback concerning whether or not schemes should be granted more flexibilities under the new code - with particular questions raised around how things like escrow guarantees or contingent assets could be used to help avoid these scenarios at significant maturity.
He said this issue of contingent assets had been specifically raised in question nine of the Department for Work and Pensions' (DWP) consultation on defined benefit (DB) funding rules - noting that the industry seemed to be saying "yes please" to such flexibilities and adding that the DWP would, no doubt, be hearing similar.
Other delegates raised concerns around how open schemes would be treated by the new funding regime - with some fearing the code could force them to close to new members.
Fairs said there would be "specific allowances" made for open schemes, but the regulator would ensure it wouldn't be possible to game these rules, with those schemes with only a very small amount of active members getting only a very small allowance but those with large numbers of actives getting more.
The regulator also addressed concerns from the audience that the "duration" to significant maturity will have come in sharply as a result of interest rate rises - adding that this was something the regulator would "reflect on" going forward.
But he said that, while there would be downsides of the reduction in duration, there would also be upsides. He said: "The target may have got closer, but it has also got smaller"
Fairs concluded by confirming the regulator was hoping to get its consultation on the draft DB funding code out by Christmas so the new code could be in place by June next year and in operation for scheme valuations from October 2023.
Industry disquiet
This comes amid increasing industry disquiet at the new funding code - with responses to DWP's consultation on DB funding rules, which closes next week, being critical about the flexibilities on offer.
In its response to the consultation, the Association of Consulting Actuaries (ACA) said that, while it strongly supported the overall objective of the funding code, it had "significant concerns" that the proposed legislation is insufficiently flexible and reduces the ‘scheme specific' element of the current funding regime - replacing it with an industry standard approach, only permitting limited variation in how schemes plan their journeys and set their ultimate destination.
The ACA said, based on these regulations, it would not be possible for the bespoke option outlined in TPR's 2020 consultation on a revised Code of Practice to be as flexible as we had hoped, and all schemes will be required to adopt fairly similar plans.
ACA chair Steven Taylor said: "The draft regulations contain a very significant ‘stand-alone' change to the provisions for recovery plans, setting a primary principle that deficits should be recovered as soon as the employer can reasonably afford.
"Although we agree reasonable affordability is a factor that should be taken into account when setting contributions, we do not agree that it should be given primacy over other factors by writing this into legislation. This is a significant change from the current code of practice requirements, which will potentially impose large additional costs on employers even if there were no other changes, conflicting with the government's growth agenda."
Taylor added: "It may also have unintended consequences for corporate borrowing. The financial impact would be exacerbated if such contributions were required even where modest expected returns were likely to clear a prudently assessed deficit.
"Given recent financial market developments we also believe the opportunity should now be taken to reflect on the broad dynamics laid out in the draft regulations that drive schemes towards very cautious investment approaches as they mature to ensure these will not contribute to increased systemic risks when viewed across the whole industry."
The ACA's comments come a day after WTW said draft regulations on DB pension funding would impose a narrow, simplistic and overly rigid framework on schemes and "should be sent back to the drawing board".
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."
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."
