The publication of the UK’s latest funding and investment regulations by the Department for Work and Pensions (DWP) yesterday addresses many of the concerns raised by the pensions industry, including specific clarifications for open schemes. However, it effectively “fires the starting gun” for the new defined benefit (DB) funding regime, consultancy LCP has said.
The final Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2023 are part of a new funding code regime for DB pension schemes, which The Pensions Regulator (TPR) first consulted on back in March 2020. Since then the code has faced significant delays.
Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association, said the DWP had listened to the industry feedback and made some “positive revisions” to the DB Funding Code regulations which enhance flexibility, especially for open DB schemes.
He said: “Importantly, it also clarifies that DB schemes can take appropriate levels of investment risk where supportable by the employer covenant.”
Peaple noted that the final set of regulations specifically provide greater flexibility by empowering mature schemes to diversify investments in a wide range of assets without constraints.
He said that the clarified stance on sustainable growth aligns with affordability considerations for sponsoring employers.
“A reduction in burdens from streamlined processes for information requests, reducing administrative burdens based on individual scheme circumstances will also aid scheme trustees. These changes signify positive strides toward a more adaptable and efficient regulatory framework,” he said.
Laura McLaren, head of DB actuarial consulting at Hymans Robertson, agreed that the update had some welcome changes.
“The updates have addressed some of the biggest concerns, including inconsistencies with the draft code of practice. Changes to reflect the government agenda to encourage scheme investment in productive finance, means fears that some schemes would be hemmed in, or herded towards very narrow low-risk investment strategies, have been reduced,” she said.
She added: “A fixed basis for maturity will help schemes map out their funding and investment strategy with a clear target date that won’t jump around with market conditions.”
But McLaren also noted that things will become clearer once the regulator publishes its new funding code.
She explained: “For example, there isn’t anything in this draft legislation confirming the specific Fast Track parameters or pinning down significant maturity.”
She said that the update is “one piece of the puzzle schemes will need to consider on regulatory compliance as their end-game plans develop”.
More clarity on flexibility needed
LCP has stated that the industry had been hoping for more clarity on flexibility for schemes once they reach “significant maturity”, which does not appear to have made it into the final draft of the regulations.
David Fairs, partner at LCP and former executive director of regulatory policy, analysis and advice at TPR, saw this as a particular issue.
“Not providing further flexibility for pension schemes in the long term could be a challenge for some scheme sponsors, and arguably is at odds with the government’s Mansion House agenda,” he said.
“Given that the Code is expected to ensure members receive their full benefit with a high level of probability, there is a real likelihood that some schemes will end up with trapped surplus,” he continued.
Fairs added that ways of accessing surplus should now become a priority for the government if it wants pension schemes to support its Productive Finance agenda.
He said that, until then, sponsors and trustees will “need to creatively consider flexibility within the overall framework set out by the government and TPR to achieve the right balance between security and flexibility”.
Jon Forsyth, partner at LCP, added that his consultancy and others in the industry had various concerns with the draft regulations, in particular that they were quite restrictive and seemed in some places to be out of sync with the greater flexibility afforded by the original draft of the TPR Code.
He said: “Though not perfect, these regulations do address many of the concerns raised, and it’s particularly pleasing to see explicit clarifications for open schemes recognising their particular circumstances.”
Forsyth said that for some DB schemes, the new funding regime won’t be a big change, but for others it will mean a significant change in approach potentially to both investment and funding strategies, and the way in which the trustees think about their sponsors’ covenant.
“Hopefully from here it’s plainer sailing for the DWP and TPR to finally get the new regime implemented and schemes can start to plan for this,” he said.
“Having said all that, it’s hard not to think of the new DB funding regime as a solution to yesterday’s problem,” Forsyth added.
He noted that since it was first mooted there have been dramatic improvements in funding positions for many schemes and the government’s DB policy is now increasingly focused on considering making use of these strong positions for investment in productive finance.
“On this front it is pleasing that the final regulations are less restrictive in forcing schemes down a path towards low-risk investments in all circumstances, but more is needed in terms of policy change if the UK is to make the best use of the £1.5trn assets in DB pension schemes whilst ensuring pensioners are very well protected,” Forsyth concluded.
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