The UK pensions industry welcomed a revised code from the UK regulator after critisising previous drafts as long-winded and prescriptive, while highlighting it is now more employer-friendly.
The Pensions Regulator (TPR) published the final version of its new defined benefit (DB) Code of Practice, which updates its regulatory framework for DB trustees and sponsors, taking into account its new statutory objective.
The regulator must now consider whether recovery plans, negotiated between trustees and sponsors, also create a sustainable growth environment for the sponsor.
The code, first published in December 2013, proposed dropping its old funding triggers and length of recover plans approach, in light of a new holistic risk-based model.
It also offered nine basic principles that should be evident at DB schemes, which, if they make their way into the final code of practice, must be legally implemented by trustees.
However, while many aspects of the Code were welcomed, it was described as too prescriptive and overly complex, with calls for a separation of guidance and regulation.
The regulator largely took on board criticisms from consultations and has now created essential guides for both trustees and sponsors, while slightly rewording its DB Code of Practice, now named ‘Funding Defined Benefits’.
The Society of Pension Consultants said the “biggest winners” of the new code would be covenant advisers, with president Duncan Buchanan noting TPR’s request to seek advice on the sponsor covenant, or explain why such a step was not necessary.
He also noted the increased flexibility now granted in deficit reduction negotiations due to the wording of the new fourth statutory objective’s emphasis on sustainability of company growth.
“Employers will be keen to explore the extent to which the sustainable investment objective permits recovery plans to become more flexible,” he said.
Graham Mclean, senior consultant at Towers Watson, said employers would also be pleased with the new objective, and that the concessions would be seen as a “victory” by those who lobbied for change.
He said the regulator would have received feedback from employers suggesting it was not inclusive of their needs, and that the question of whether this change was positive would depend on a company’s position within negotiations.
“Employers may feel emboldened in the next round of negotiations with trustees,” he added.
“They haven’t reduced the length substantially, but addressed areas of ambiguity making it slightly better.”
Aidan O’Mahony, partner at Aon Hewitt, said the regulator had taken criticisms on board, with the Code being less long-winded and prescriptive, and more principles based.
He backed Mclean’s observation and said there was a lot more focus on the employer requirements, giving sponsors more negotiating power.
“The updated code explains in more detail how the new objective will be interpreted and used, but it has been polished up, compared with December, and leans more towards giving employers ammunition,” he said. ”This is an attempt to give employers breathing space
“The previous code was perhaps a little Stalinist and told trustees to negotiate robustly, but this is more about collaboration.”
Mercer partner Deborah Cooper said the regulator had largely absorbed the critical feedback it received.
She also welcomed the removal of the Balanced Funding Outcome (BFO) method – which would have integrated covenant, funding and investment risk – and said its new approach to using a funding risk indicator was more sensible and positive.
“The language is now a lot more forgiving and friendly to both trustees and employers with regard to risk taking,” she added.
The business lobby group CBI, which had led the call for the new statutory objective, also welcomed the Code.
Head of pensions Jim Bligh said the organisation was pleased TPR had recognised the need to balance pension commitments with company growth.
“The CBI has repeatedly stated that a strong, solvent employer that can invest in the future is the best guarantee for a member’s pension benefits, and it’s good to see the regulator supporting this,” he added.
The regulator’s interim chief executive Stephen Soper stressed, however, that it would only be required to minimise any adverse impact on the growth of companies.
“In the vast majority of circumstances, trustees and employers should be able to agree funding plans that both benefit the business and strengthen the scheme’s long-term security – but this can only be achieved by employers and trustees working openly and collaboratively,” he said.