Several consultancies and pensions industry bodies have outlined significant concerns around the inflexibility and potential consequences of the UK Department for Work and Pensions’ (DWP) consultation on the draft Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2023, which closed for consultation this week.

DWP’s consultation was seeking industry views on the draft regulations that set out the detail of the new requirements in the Pensions Act 2004, inserted by the Pension Schemes Act 2021, for defined benefit (DB) pension schemes to have a funding and investment strategy and submit a statement of strategy to The Pensions Regulator (TPR).

Following a recent poll conducted by Aon of its clients during a webinar, 80% of respondents expressed concerns over the new funding regime’s direction of travel. Within that 80%, 20% said they were “very concerned”.

Matthew Arends, partner and head of UK retirement policy at Aon, said: “While we support the overall objective of the draft regulations, we do have major doubts over whether the proposed legislation is sufficiently flexible and whether the consequences of these potential changes have been properly addressed.

“However, we agree that trustees of maturing schemes should consider a long-term target that covers both investment and funding level, as well as establishing a plan to move towards the target as the scheme becomes more mature. All this should be done with the employer’s agreement.”

Aon also outlined its views on the potential unintended consequences if the regulations are enacted in their current form, such as:

  • a less flexible funding regime that cannot readily adapt to new forms of volatility and changing financial conditions, and which compels all schemes to adopt very similar strategies based on a particular understanding of risks;
  • higher pension costs for UK companies, which will restrict economic growth.

Arends added: “With the absence of a proper impact assessment, along with the lack of a response from The Pensions Regulator to its 2020 consultation on scheme funding, these concerns remain. Schemes need continued flexibility and greater certainty to make better decisions.”

Iain McLellan, head of research and development at Isio, said: “The proposed DB funding and investment rules would act to tighten the straitjacket on trustee flexibility, however, the draft regulatory framework would have failed the ‘stress test’ of the last two weeks, so perhaps the DWP should go back to the drawing board to provide the flexibility for strategies to be genuinely scheme-specific.”

Weakening turstee powers

In its response to the DWP consultation, the Association of Professional Pension Trustees (APPT) welcomed the desire to strengthen the funding regime and make it more robust in order to ensure the long-term security of member benefits.

However, flexibility within the funding regime will be extremely important for ensuring that each scheme takes appropriate steps to meet their long-term objectives, the associaiton stated.

“In particular, we highlight the weakening of trustee powers in relation to the funding and investment strategy that, under the draft regulations, would require the employer’s formal agreement as well. We value the existing approach of needing only to consult with the employer as this gives trustees a strong negotiating position,” it said.

APPT chair Harus Rai said: “Further guidance for trustees would be welcome as the regulations are implemented. For example, recent market events in the Gilt markets have highlighted the importance of maintaining liquid assets but it has become difficult for trustees to forecast such events.”

The Associaiton also noted that there is no reference to diversity and encouraging this topic as part of the requirement to appoint a chair under the new regulations. The APPT also anticipate that the new requirements will encourage the professionalisation of the industry and further guidance should highlight the support available for any lay trustee boards struggling to implement the necessary changes for their schemes.

Looking at the economic impact assessment, the APPT believes there will be increased costs and administrative burdens as a result of the new regulations. Without sufficient flexibility, this could place a strain on trustee and employer relationships at a time of economic uncertainty. Wider costs involved in planning, implementing and reviewing the new requirements remain uncertain, which is unsatisfactory, it stated.

”Overall, the new regime will help accredited professional trustees to ensure the long-term security of members’ benefits as long as flexibility is maintained. However, we must be aware of the strains on existing relationships between trustees and employers and that the overall costs of meeting the new requirements are not understated,” APPT said.

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