Commenting on the publication of TPR's Funding Code consultation
03 Mar 2020
Welcoming the publication of TPR’s Funding Code consultation and commenting on some of the surprise implications of the proposed approach, Susan McIlvogue, Head of DB, Hymans Robertson says:
“With TPR’s publication of its Consultation on the Funding Code we finally have some detail on the exact form of the new framework. The approach outlined in the consultation will continue to improve member security in DB schemes, and for many well run schemes it will mean no significant change to their funding or investment strategies. However, it does contain a few surprises.
“Despite the new regime being welcome, there are some significant implications from the proposals that will have an impact on the DB universe. Remaining open schemes will be hit particularly hard, with the same requirements applying to open schemes as closed schemes. This could force further DB closures by the back door, by pushing up future service contribution rates, and ultimately lead to the acceleration of the disparity between the security of accrued DB benefits and the level of pension provision for future service and future generations. Likewise, it could force more stressed employers into insolvency at the expense of trying to secure DB benefits, further tarnishing the reputation of DB in the corporate world, and potentially undermining promising initiatives like CDC. Put simply, it could push up costs so high that DB pensions become a thing of the past.
“Significantly, businesses struggling to support their DB schemes won’t be spared under the new rules. They are being asked to prioritise pension contributions above dividends and TPR is willing to put businesses into insolvency if they don’t have a viable plan to fund their scheme. We’re seeing the natural consequences of Frank Field’s select committee being played out, with the security of DB pensions being out in front of jobs and today’s pension saving.
“The issue of TPR enforcement is held back until the second consultation, so the industry is being asked to opine on a framework without being able to fully understand the implications of adopting a bespoke approach that is less valuable than TPR’s Fast Track Equivalent assessment.
“From an investment perspective there’s a risk of herding, with a lot of schemes adopting similar funding and investment strategies. This could have unintended consequences such as a levelling down of contributions and funding targets to the fast track approach, moving £1trn of DB assets towards gilts. The risk of herding investment strategies seems particularly acute, as schemes going down fast track will all be chasing similar strategies, pushing up the cost of those assets.
“Much of TPR’s focus is directed at what TPR calls “small schemes” with fewer than 100 members. Small schemes make up 2,000 of the UK’s 5,500 DB schemes and are the area where TPR is most concerned about poor governance. TPR makes open reference to new Consolidator offerings which could help this part of the market. Before consolidators can help small schemes TPR and DWP need to give them the go ahead, and it’s taking an age for TPR to finish their due diligence.”
Continuing by applauding some unexpected flexibility in TPR’s proposed approach, Susan says:
“A welcome aspect to the consultation is the continuing flexibility that is permissible under this regime. This is great to see as introducing a prescribed regime can stifle much needed innovation. Such flexibilities include the suggestion that if a scheme goes down the bespoke route it doesn’t necessarily mean that regulatory intervention will happen. Instead, if TPR assesses that the bespoke approach is at least equivalent to their fast track approach (their Fast Track Equivalent) then they won’t intervene. This leaves schemes with much needed flexibility within parameters to go down the bespoke approach if their situation merits a different approach (e.g. a longer recovery plan with security).
“The way in which Technical Provisions trends to the Low Dependency basis are open to consultation, again leaving space for schemes to take a range of approaches even under the fast track approach. Taking a lower risk approach and holding that level of risk for longer may be preferable to gradually de-risking over time, which can force schemes to keep de-risk at times of adverse market conditions”