When we last addressed the topic of scheme funding, we expected that, by October 2023, the Pensions Regulator (TPR) would have launched the “Defined Benefit Funding Code of Practice” (the Code) and the Government would have introduced the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2023 (the Regulations).
The Code and Regulations both remain in draft and are now expected to come into force in April 2024. In the meantime, the Government’s Mansion House proposals in July 2023 may have thrown the cat among the pigeons.
The story so far
As we’ve previously discussed, the proposed Code and Regulations as they currently stand would be expected to usher in a more prescriptive scheme funding regime. The key proposals under the new system (as currently drafted) are:
- In line with the Pension Schemes Act 2021 (PSA21), a requirement that trustees draw up a Funding and Investment Strategy (FIS) for their scheme. The objective is funding on a low dependency basis: by the time a DB scheme reaches “significant maturity”, no further employer contributions should be required to meet pension promises. The agreement of employers is required for the FIS (if other funding matters must be agreed with the employer for the relevant scheme).
- A “twin track” supervisory structure as a filtering mechanism, with a “Bespoke Track” (flexible and more akin to current practice) and “Fast Track” (with defined criteria which, if met, would mean less flexibility but also less scrutiny by the Pensions Regulator) approach.
These proposals have raised concerns for a number of reasons. Most significantly, there is a worry that once schemes become significantly mature, the funding requirements will become overly prescriptive and insensitive to each scheme’s actual circumstances.
Specifically for sponsors, a new principle in the Regulations that funding deficits should be recovered “as soon as the employer can reasonably afford” may lead to trustees pushing for aggressive recovery plans to be implemented, even where this could potentially damage the sponsor’s own sustainable growth. Further, certain elements of the Code emphasise the role of the trustee (rather than the employer) more than might be expected under a balanced regulatory framework.
Whilst the industry awaited further news on the Code and Regulations, Chancellor Jeremy Hunt delivered his Mansion House speech in July 2023, proposing a number of reforms (the Reforms) which appear to be at odds with the new pensions funding framework.
The Mansion House Reforms
One of three “golden rules” in the Reforms is strengthening the UK’s position as a leading financial centre able to fund public services through its wealth creation. In this regard, the Chancellor emphasised the need for DB schemes (as well as DC schemes) to play a role in productive UK investment. In tandem, the DWP launched a call for evidence to explore greater flexibility in how DB scheme assets are invested, and whether there may be greater choice for DB scheme sponsoring employers and trustees.
This intervention marked a big change from the focus of the Code and Regulations, suggesting a greater interest in flexibility and less supervision of DB schemes. It is still unclear where the Reforms will take the DB pensions industry, but we expect they may well have an influence on loosening the degree of supervision proposed over the last two years.
What’s next?
TPR released a statement following the Chancellor’s speech, which expressed support for the Reforms. Nausicaa Delfas, TPR’s Chief Executive, described the reforms as supporting their “ambition for pension savers to be in large, well-run schemes that deliver good outcomes at every stage of their retirement journey”. TPR views the Reforms as leading to a long-term focus on value, with the different initiatives representing “a welcome boost for innovation in savers’ interests”.
Watch this space, however: we query whether the Reforms will change the course of the debate to introduce a less prescriptive approach to DB pensions funding than originally envisaged under the Code and Regulations.
