The possibility of a Pensions Bill in the next parliamentary session should provide clarity on the funding framework for defined benefit (DB) schemes.
The Government's white paper in March 2018 proposed that the Pensions Regulator should issue a revised code of practice focusing on how prudence is demonstrated when assessing scheme liabilities, appropriate factors for recovery plans, and ensuring that a long-term view is considered when setting the funding objective. Some or all of the funding standards contained in this revised code would be given statutory force.
Since then it's gone pretty quiet. That is, until the Regulator's blog post:
So, what is clear?
At the heart of the revised code will be the concept of the long-term objective (LTO) and how the scheme's statutory funding objective should be achieved in this context:
"Reaching the LTO is equally as important as setting a good LTO."
The Regulator will consult on:
- A suitable LTO which, for closed schemes, would include reaching a position of low dependency by the time they're significantly mature.
- Setting clearer parameters around journey plans (i.e. discount rates) and associated technical provisions based on scheme-specific factors such as covenant strength and maturity.
- Clearer guidelines on the lengths of recovery plans for different covenant strengths – i.e. should stronger employers be required to fund technical provisions deficits in a shorter period?
- How contingent support could remain a central part of funding solutions.
The consultation will also outline proposals for how trustees could demonstrate whether the risk in their investment strategy is supported, for instance through a simple stress test. This is interesting as it's the piece of the funding puzzle outside both the Regulator's and the employer's remit.
Although we await the legislation and the revised code, what's clear is the view that in order to be "fit for purpose", the DB funding regime requires increased regulatory intervention.
Originally published August 2, 2019
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