Given the material improvement in funding positions of defined benefit (DB) pension schemes, new regulations now appear “superfluous”, according to the latest analysis of FTSE 350 DB schemes by consultancy firm Barnett Waddingham.
The DB Funding Code has been in the works for a number of years and will require DB schemes to target low dependency funding basics over the long term.
The expectation is that this will be in force from next April, after the original launch date of 1 October was pushed back following calls from the industry.
However, because of the improved funding position of DB schemes following the increase in bond yields over the past year, the relevance of the Code has been called into question.
According to analysis by Barnett Waddingham, around 80% of the FTSE 350 DB schemes are likely to pass all three of The Pensions Regulator’s (TPR) Fast Track tests as at 30 June 2023.
This is substantially higher than TPR’s own assessment that 51% of schemes would pass all three tests as of 31 March 2021. Barnett Waddingham said this largely reflects the significant improvement in average scheme funding positions over the past two years.
Meanwhile, others will already be complying with the strict requirements of the Code, the consultancy firm added, which are less prudent than the Fast Track tests, and opt for a “Bespoke” submission instead.
According to Barnett Waddingham, around 90% of FTSE 350 DB schemes are already broadly compliant with the guidance in the Code.
Mark Tinsley, principal at Barnett Waddingham, said: “Many pension schemes have seen large improvements in their funding positions over the past year and now have significant surplus funds. Sponsors therefore stand to benefit considerably if the rules around returning surplus funds are relaxed, as is being considered under the so-called ‘Mansion House’ reforms.”
Tinsley added that any reforms should ensure that members of pension schemes are not adversely affected, meaning that extra forms of security may also be needed.
He questioned the benefit of requiring schemes to target a low dependency funding level amid improvements in scheme funding positions as is separately being planned by the Department for Work and Pensions (DWP) and expected to be reflected in the new Funding Code issued by TPR.
He said: “The vast majority of pension schemes are now already meeting the proposed stricter funding requirements, so the additional costs associated with requiring all schemes to comply with the proposed changes to the Funding Code may now be difficult to justify.“
Recommendation to halt the Code
Back in June, the Work and Pensions Select Committee recommended that DWP and TPR halt their existing plans for the new Funding Code, at least until they had produced a full impact assessment for the proposal.
With the recent Mansion House reforms, Steve Hodder, partner at LCP, said it is “hard to say that the Funding Code will be top priority right now”.
He added: “There’s growing sense in the industry that the Funding Code was something we needed five or so years ago when it was first worked on and the time actually passed now. With most of the people I speak to in the industry, there’s a sense that it’s not needed anymore.”
Hodder added that the industry would be “reasonably happy” if it “slipped away and didn’t happen”.
More regulation to “problems of the past” brings more governance burdens, Hodder added.
He said: “It adds a lot more for trustees and companies to do and new statements to write. The last thing we need in pensions world is more written policies and hoops to jump through.
“If [the Funding Code] doesn’t happen we might all breathe a sigh of relief.”