Flexibility will be needed in TPR’s Code of Practice parameters to enable schemes to reach Fast Track
70% of DB schemes would not meet TPR’s Fast Track requirements
05 Nov 2020
Nearly three quarters of DB schemes (70%) would not meet TPR’s fast track requirements according to analysis undertaken by Hymans Robertson. Using the funding plans of a representative sample of clients, the leading pensions and benefits consultancy found that less than a third of schemes (30%) would pass all four of the proposed Fast Track tests on the Long Term Objective, technical provisions, recovery plan and investment risk. The firm warns that, in the wake of Covid 19, it is likely that TPR’s parameters for the Code, being consulted on next year, will need to be more flexible to allow Fast Track to remain achievable for most schemes.
The analysis of which schemes will meet Fast Track requirements is almost exactly in line with the results on a poll of DB trustees held by Hymans Robertson at a webinar earlier in the year. 35% believed they were in a good place to achieve Fast Track while 65% did not. It shows that the industry is aware of the barriers to going down the Fast Track route.
Explaining that which routes schemes are likely to take will depend on the parameters set out after TPRs next consultation in early 2021, Stephen Jasinski, Associate Investment Consultant, Hymans Robertson, says:
“Clearly schemes are beginning to consider the impact of TPR’s Code of Practice even though we are awaiting the final parameterisation of the framework. This will very much hinge on where these parameters are nailed down and, in particular, how they differentiate between different covenants. Two-thirds of schemes that passed the tests have a sponsor with a strong covenant rating. This suggests that Fast Track will be a higher barrier to clear for those with weaker covenants.
“Similarly, where schemes failed the tests, the most common reason for this across all covenant grades was that their recovery plans were too long. In some cases, this will be because the deficit has increased since the recovery plan was set – notably in the context of the turmoil caused by Covid-19 – or because the recovery plan can no longer allow for additional asset outperformance.
“For schemes close to meeting requirements then it could be relatively straightforward to do a bit of repackaging to be able to go down the Fast Track route. That repackaging will be harder for schemes doing something quite different or where the gap is large. To pass all four tests and comply with Fast Track, cash requirements may have to increase for sponsors in the short to medium term. In the current environment where sponsor affordability is already constrained, this prospect will loom particularly large.”
Commenting on the implications of this for where the parameters are set by TPR, Stephen continues:
“Pinning down these parameters, which is the subject of the second consultation due next year, in a post COVID pension landscape is likely to affect how many schemes opt to go down the Fast Track route.
“TPR has said that it doesn’t have any specific targets for the number of schemes that will follow a certain approach. However, it is certainly trying to set Fast Track at a level that is appealing to a number of schemes as a more prescriptive route to compliance. Given developments since the consultation was published, it is likely that the parameters will need to be set towards the more flexible end of the spectrum so Fast Track remains an achievable target for most schemes.”