If you are a sponsor or trustee of a defined benefit pension scheme, you should now be fully aware of TPR's Code of Practice published in July. This helps trustees and sponsoring employers to agree funding plans that provide security for retirement savings, while enabling employers to invest in sustainable growth.
The code is part of a significant change in the regulator's approach to DB schemes. It recognises that a strong ongoing employer alongside an appropriate funding plan provides the best support for a well-governed scheme.
The code urges trustees and employers to work in a collaborative and transparent way to consider the impact that scheme funding proposals may have on the employer's plans for sustainable business growth.
It also recognises that risk is inherent in pension schemes and expects trustees to identify and manage the key risk areas of investment, funding and employer covenant.
At Smith & Williamson, we see this as a big step forward in safeguarding people's defined benefit pensions. A clear integrated risk management plan and closer collaboration between employers and trustees will make sure schemes are run more effectively. Schemes should take account of the risks and cash contributions the business can support and ensure this is reflected in both the investment and funding strategy.
Looking at the code in more detail, one of the most important changes for employers is the re-wording of the requirement to eliminate deficits, "as quickly as the employer can reasonably afford," to instead consider the appropriate period in which to do so in view of the risks to the scheme and impact on the employer. TPR says this is not a change of policy, rather a clarification of its true stance so this clarification will be greatly appreciated by employers, as recovery plans can now be implemented over longer periods with TPR's agreement.
Employers will also appreciate the watering-down of wording that appeared to require trustees to scrutinise the employer's dividend policy against the impact on covenant and the possible alternative use of part of those payments as contributions to the scheme. TPR has now clarified that such scrutiny should only come into play when the covenant is known to be constrained, or dividends are exceptionally large or paid at an unusual time. This will avoid employers being drawn into unnecessary discussions with trustees around their dividend policies, without detracting from the fact that employers must consider scheme funding requirements (alongside other creditors) when planning dividends.
Although the code is welcome by most, it may pose a serious challenge for lay trustees as not only do they need to understand the interaction between funding, employer covenant and investment risks, the code now requires them to balance funding with the need to minimise any adverse impact on an employer's sustainable growth.
Lay trustees who hold senior roles in the business could face significant conflicts of interest. Additionally all lay trustees will have to absorb considerable amounts of information to enable them to make informed, balanced decisions. Having a professional independent trustee on the trustee board of a DB scheme and provide the lay trustees with some support and reassurance.
We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014. code: 14/989 expiry: 28/02/15