Commenting on The Pensions Regulator’s (TPR) second consultation on the Defined Benefit Funding Code of Practice (the Code), Laura McLaren, Partner, Hymans Robertson says:

“We broadly agree with the principles outlined in the Code and within the Fast Track regulatory approach. TPR has signalled its direction of travel for some time, and its approach generally seems to strike a good balance between setting out the principles and expectations of the new regime, with providing enough flexibility for schemes to determine long-term strategies which suit their own circumstances. We welcome this flexibility, but we have concerns about several potential inconsistencies with the DWP’s draft regulations. We strongly believe that the final DWP regulations should be less prescriptive to ensure that following the principles in the Code will mean complying with the law.

“We think it is important that DWP and TPR take the time to get this detail right, even if that would lead to a delay in implementation beyond 1 October 2023. One of the main areas of uncertainty is the measure used for significant maturity and the impact of changes in market conditions, as seen in 2022, could have on schemes being able to map out their funding and investment strategy with a clear target date. With the draft legislation tightly defining this as a specified duration of liabilities, we would advocate for more stability and the regulations being reworded to set significant maturity with reference to the point most members have retired. Then, aligned with this principle, duration could be a preferred measurement approach but not the only metric that’s permitted.

“Amongst our other concerns on the new regime, we note that trustees will have to consider covenant in much greater detail balancing the additional cost and governance this may bring. Simplifying the assessment into covenant reliability ‘bands’ could help. We are also concerned that the provisions for contingent assets may lead to fewer of these being offered to schemes if credit cannot be easily recognised. Finally, we note that the new regime will significantly add to the governance burden for open schemes, focussing on some areas which do not add much value. A carve-out of at least some aspects of the Code seems appropriate for genuinely open schemes.

“Ultimately until both the Code and the regulations are finalised, some caution remains over the precise impact. It is those schemes that find themselves already at, or close to, significant maturity or with weaker sponsor affordability that will be most impacted. Though all schemes are still going to have to do more governance-wise to map out future strategy in the format required and report on progress. With important detail including the measurement of maturity still to be pinned down – and more consultation on the Statement of Strategy and further covenant guidance to come – current timings are starting to look increasingly ambitious. Until there is more clarity on what is coming when, it will be particularly challenging for schemes with an upcoming valuation to plan meaningfully ahead.”