After months of waiting, the Pensions Regulator (TPR) finally launched its consultation on the new DB funding code of practice on 16 December 2022. TPR published several documents, which can be accessed at the links below:
- draft DB funding code of practice
- consultation document on the draft DB funding code of practice
- consultation document on Fast Track and our new regulatory approach
Key points
Whilst there are way too many points to cover in a single blog (collectively, the documents are around 200 pages long!), I’m going to touch on a few key areas.
The consultation documents confirm details around setting a long-term funding target based on a low dependency basis and devising a journey plan to get there. Definitions of the “relevant date” and “significant maturity” are also included, with the latter being hardcoded as the point when a scheme’s duration reaches 12 years. I speculated in my November blog whether TPR would decide against hardcoding this figure in the final draft given how sensitive it can be to movements in underlying gilt yields. It will be interesting to see how the application of this measure plays out in practice if we see similar movements in gilt yields to those experienced towards the end of 2022. My November blog can be accessed here: Scheme funding regulations consultation (spenceandpartners.co.uk)
Outside of the code itself, TPR has put the expected flesh on the already known bones of the Fast Track framework. TPR explains that, if an actuarial valuation submission meets a set of defined Fast Track parameters, then it is unlikely to be scrutinised in significant detail, although it stresses Fast Track is not a route to “minimum compliance” and it instead represents TPR’s view of “tolerated risk”. It is also worth noting that Fast Track is not mentioned in the legislation so is not included in the draft code itself. It is now a regulatory approach set out by TPR to bring greater clarity to its approach to the scheme specific DB funding regime.
To qualify under Fast Track, schemes must be fully funded on a reference low dependency basis by the point of significant maturity. The reference low dependency basis set out in the consultation is gilts plus 0.5% per annum. Flicking back to the Code itself, TPR gives details of a corresponding low dependency investment allocation as 85% corporate bonds and government gilts (assuming appropriate maturities for the bonds) and 15% growth assets.
Schemes which are still some way from significant maturity will likely be funding on a Technical Provisions basis that looks rather different to the low dependency basis. Thus the journey to achieving full funding on the low dependency basis will be on a sliding scale. TPR has set out that a scheme with an initial duration of 20 years may be funding based on discount rate of gilts plus 2% per annum reducing to gilts plus 0.5% per annum by the time the duration falls to 12 years. As a result, TPR would expect this example scheme’s Technical Provisions to be around 85% of the corresponding low dependency liabilities. This target percentage increases to around 96% by the time the duration falls to 15 years.
In terms of recovery plans, TPR has confirmed it has rejected the idea of having different maximum recovery plan lengths according to covenant strength. Instead, for practical reasons, TPR has opted for the only distinction being by scheme maturity: maximum recovery plan lengths will be 6 years for schemes that have not yet reached significant maturity and 3 years for schemes that are after this point.
Actuarial valuation submissions that do not meet the Fast Track parameters will be classed as Bespoke submissions. TPR stresses that the “principled based” Bespoke submissions and Fast Track submissions are both equally valid. However, Bespoke submissions can expect far more TPR engagement than those under Fast Track.
Action
While the new funding code is under consultation, it is hard to see that there will be material changes between now and when it is finalised. Trustees and sponsors should engage with their advisers now on how they will deal with the new code and what it might mean for levels and pace of scheme funding.