Starting gun fired for new funding regime
Pensions & benefits DB investment consulting DB pensions Policy & regulation
Earlier today DWP published the funding and investment regulations which will underpin the new DB funding regime.
The road to the new regime has been a long and winding one, with TPR’s first consultation on the new regime being back in March 2020, and there have been several delays between then and now.
However the publication of these regulations effectively fires the starting gun for the new DB funding regime. These regulations now await parliamentary approval expected in the coming weeks, and are then expected to be “in force” from April. The new Code – which is the Regulator’s interpretation of the regulations – is then expected to follow shortly after that.
However the new Code is not now expected to be effective until the September this year and it is at that point that the regulations will become effective in practice – and then only for DB pension scheme valuation dates that are after the effective date of the new code, which has been effectively confirmed as 22 September 2024. The first valuations subject to the new regime could therefore be those with valuation dates of 30 September 2024.
The final regulations address many of the concerns raised by industry, including specific clarifications for open schemes. However many had also been hoping for more clarity on flexibility for schemes once they reach “significant maturity”, which does not appear to have made it into the final draft.
David Fairs, LCP Partner and former Executive Director of Regulatory Policy, Analysis and Advice at TPR, saw this as a particular issue, stating:
“Not providing further flexibility for pension schemes in the long term could be a challenge for some scheme sponsors, and arguably is at odds with the Government’s Mansion House agenda. Given that the Code is expected to ensure members receive their full benefit with a high level of probability, there is a real likelihood that some schemes will end up with trapped surplus. Ways of accessing surplus should now become a priority for Government if it wants pension schemes to support its Productive Finance agenda. Until then, sponsors and Trustees will need to creatively consider flexibility within the overall framework set out by the Government and TPR to achieve the right balance between security and flexibility.”
Commenting more generally on the regulations, Jon Forsyth, Partner at LCP said:
“It’s great to see the starting gun for the new DB funding regime finally fired, and what is more it is pleasing to see that DWP has listened to the industry in a number of areas in making updates that we support, relative to the draft regulations we previously saw.”
“LCP and others in the industry had various concerns with the draft regulations, in particular that they were quite restrictive and seemed in some places to be out of sync with the greater flexibility afforded by the original draft TPR Code. Though not perfect, these regulations do address many of the concerns raised, and it’s particularly pleasing to see explicit clarifications for open schemes recognising their particular circumstances.”
“For some DB schemes the new funding regime won’t be a big change but for others it will mean a significant change in approach potentially to both investment and funding strategies, and the way in which the Trustees think about their sponsor’s covenant.”
“Hopefully from here it’s plainer sailing for DWP and TPR to finally get the new regime implemented and schemes can start to plan for this.”
“Having said all that, it’s hard not to think of the new DB funding regime as a solution to yesterday’s problem. Since it was first mooted there have been dramatic improvements in funding positions for many schemes and the Government’s DB policy is now increasingly focussed on considering making use of these strong positions for investment in productive finance. On this front it is pleasing that the final regulations are less restrictive in forcing schemes down a path towards low-risk investments in all circumstances, but more is needed in terms of policy change if the UK is to make best use of the £1.5 trillion assets in DB pension schemes whilst ensuring pensioners are very well protected.”