Defined benefit pension scheme funding: funding code laid before Parliament

The Pensions Regulator (TPR) has published and laid before Parliament the long-awaited new Defined Benefit (DB) Funding Code of Practice (the Code). The Code was published alongside responses to the consultation on the draft Code and TPR's regulatory approach to assessing valuations.

The Code will replace the existing DB funding code for valuations with effective dates on or after 22 September 2024. There will be a gap between when the requirements of the Funding and Investment Strategy Regulations (the FIS Regulations) start applying and the Code is in force  (see our previous update on DB scheme funding in which we discuss the FIS Regulations in greater detail). TPR has said that schemes with valuation dates falling within this period can use the Code as the basis of their approach, and TPR will take a 'reasonable regulatory approach' to those schemes.   In any case, because of the 15 month period before a valuation must be submitted to TPR and the relatively short gap between the coming into effect of the FIS Regulations and the Code (a gap due largely to the proroguing of parliament for the recent election), we don’t anticipate most schemes will have an issue in practice.

Both industry professionals and TPR have highlighted the greater flexibility in the final Code. TPR has said that the Code has necessary flexibilities to be relevant and supportive of all DB schemes, including open ones. In particular,  TPR has revised the Code to remove prescription as to how trustees should test the high resilience of their low dependency investment allocation. This is intended to provide the flexibility for trustees to carry out a suitable test for their scheme, provided they can be satisfied that it demonstrates low dependency on the employer. TPR has also said that there is flexibility embedded in the new funding regime for trustees to adopt scheme-specific investment strategies and invest in productive assets, both at low dependency and along the journey plan where appropriate and supportable.   The extent to which this has been achieved will no doubt be assessed as part of the review into pension scheme investment announced last week by the Chancellor.

If you would like to discuss any issues relating to the new scheme funding regime, please get in touch with your usual Freshfields contact or any of the authors.