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The future of DB funding
9 October 2020

The future of DB funding

Our first consultation on Defined Benefit (DB) funding closed last month (September). It ran for six months and we wanted the industry’s help to shape the foundations of how we regulate DB schemes for years to come. I’m delighted that we received about 150 responses.

My team are now analysing the responses, which will inform the next stage of our consultation process. They will further develop the rules and principles of the draft funding code, and then engage with industry to test our ideas. Once this has been completed, and we have the final legislative package from the Government and the draft regulations, we will launch the second consultation on the draft DB funding code. Pleasingly, it looks like many have taken up the challenge of setting out their view of the balance of costs and security of member benefits, and some of the challenges for open schemes and multi-employer schemes.

In this article, I will reflect on some of our key proposals and how they should provide open and closed schemes with the clarity and flexibility needed to protect member benefits. To do this, I will answer some commonly asked questions.

What is the twin-track approach to valuations?

The current funding framework is working largely as intended. However, there is room for improvement, specifically around providing greater clarity on what we expect from trustees and employers. That’s why we proposed a twin track approach to compliance – Bespoke and Fast Track. Under Fast Track we will set out clear guidelines around what we think is an appropriate scheme funding approach. This will be particularly helpful for small schemes with less access to advice or more limited budgets.

We plan to say more about these benchmarks in our second consultation process next year.

The current regime means that all schemes effectively take a Bespoke approach and are assessed on a caseby- case basis. But, without explaining what ‘good looks like’, we are not making efficient use of our regulatory resources. We have found, over recent years, that employers and trustees find it helpful when we clearly set out our position in reaching the right balance for setting technical provisions and future contributions.

How does The Pensions Regulator (TPR) propose to regulate the Bespoke option?

Bespoke is a scheme-specific approach, similar to the current regime all schemes are in now. However, our proposals in the first consultation intended to bring clarity for schemes and objectivity to assessing that valuations and recovery plans are compliant with legislation.

Bespoke will offer trustees flexibility if they cannot, or choose not, to meet Fast Track guidelines – although of course trustees will still be expected to follow our core set of principles. Trustees will also need to explain how or why their Bespoke arrangement is appropriate and we will look to see how it deviates from Fast Track and how any additional risk has been managed.

Trustees of schemes in Bespoke may have a closer relationship with us if we want to ensure their valuation meets our compliance expectations. However, we envisage many Bespoke arrangements will be relatively straightforward and may not require further engagement from us.

What will the DB code mean for open schemes?

Our proposals sought to secure a reasonable balance between protection of member benefits, fairness between schemes, and flexibility for schemes to fund and invest as they wish – especially where they have a strong covenant and a long-time horizon.

We know the best support for a DB pension scheme is a strong employer. So, we’re keen to ensure the new funding framework doesn’t lead to unnecessary scheme closures by unduly increasing scheme running costs. However, for funding purposes, we think it is important to distinguish between past (accrued) and future benefits.

I firmly believe members’ accrued benefits should be protected to the same level in open and closed schemes.

What will this mean for an open scheme’s long-term objective?

We propose it should be the same as that of a closed scheme: low dependency funding by the time the scheme has become significantly mature.

However, open schemes tend to be less mature than closed schemes, so it will take them longer to become significantly mature and reach their longterm objective. Truly open schemes with a strong flow of new entrants might never mature. This means more flexibility over their funding and investment strategies in the meantime. Some of the discussions we have had suggest that not everyone has picked up on this within the consultation document.

Looking ahead

We welcomed the challenges and criticism of the approach and views we published back in March. These will help us develop a code that is robust, relevant and flexible enough for the real world. We have had a record number of consultation responses. To do each of those consultation responses justice, we will now take time to read them in detail and think them through carefully against the questions we raised. To all those who have taken the time to respond, could I say a heartfelt thank you, particularly those who have taken the time to set out why they don’t think we have got it quite right and proposed alternative approaches.

When we publish the second stage of our consultation I hope we receive a similar level of support, feedback and even criticism.

Notes/Sources

This article was featured in Pensions Aspects magazine October edition

back to Pensions Aspects Magazine

Last update: 8 October 2020

David Fairs
David Fairs
The Pensions Regulator
Executive Director of Regulatory Policy, Analysis and Advice

Pensions Administrator

Salary: £24000 pa

Location: Kent and Home Working (2 days office and 3 days home)

Pension Project Administration

Salary: £35000 - £45000 pa

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