Labour say they want growth – but will the funding code help deliver it? – LCP

Following inevitable delays due to the recent General Election, the Pensions Regulator (TPR) has finally published its Funding Code of Practice, the key piece of regulatory guidance for the new DB pension funding regime.

Commenting on the publication, LCP Partner and former Executive Policy Director at TPR David Fairs said: “The Funding Code has been a long time coming. Initial work commenced in 2018, and TPR’s first consultation on the new Code was published just before the pandemic. At that time, many schemes had a significant deficit, and the new regime was intended to provide greater security for members. As a result, there was real concern about the financial strain the new Code might put on sponsors.

“The journey to final publication has been disrupted by two elections, numerous prime minister changes, achieving Brexit, a pandemic, the gilts crisis and a European conflict. Changes in financial markets mean schemes are now much better funded, so the pressure for additional contributions has reduced, and we have a new Government. As a result, this final Code has landed in a very different world.

“Importantly, will it help to deliver the growth the Government is looking for? The new funding regime’s underlying path to low-dependency investments appears at odds with the Government’s clearly stated focus on growth and investment in the UK economy. The Government’s pensions review announced on 20 July has a strong emphasis on boosting productive UK investment – and the funding code does not encourage DB schemes in that direction – although there does appear to be greater flexibility in the final Code.

“The new Code will require all trustees to carry out proper risk management - which is a good thing - but the new regime now seems to be a heavy burden in a world which has moved on since the original draft. The lack of flexibility in the regulations post-significant maturity means many schemes will need to think creatively to avoid trapped surplus. That puts greater emphasis on the need for new legislation to make it easier for schemes to run on and permit easier extraction of surplus if we are not to have schemes defaulting to buy out rather than considering options that involve investing in UK growth.”

LCP Partner and Head of LCP’s DB Funding Group Richard Soldan added:

“Now that we have the new Code, trustees and employers can move forward and properly assess the impact of the new regime – but, given the changes in funding levels for most schemes, is it solving a problem that no longer exists? The impact assessment published by DWP suggests minimal aggregate changes to employers’ contributions.

“The new regime means all trustees and sponsors will need to consider new concepts in each of the actuarial, investment and covenant areas and report their conclusions on these to TPR – even if their scheme is fully funded. This will put the onus on trustees to consider these topics carefully, and employers will want to be involved to make sure their interests are taken into account.

“At a more detailed level, I’m pleased to see some more potential flexibility for open schemes, recognising the very different characteristics of such schemes compared with the vast majority of schemes in TPR’s regulatory universe. It’s vital that TPR’s approach does not unduly compromise the ability of such schemes to continue to provide good pensions to their members.”