The Pensions Regulator (TPR) expects to publish its new funding code in Spring 2024. The code will apply to all DB schemes either immediately after implementation or within three years for schemes whose valuations are before April 2024.
Following TPR’s funding code consultation, schemes will be presented with two options for their path towards the regulator’s goal of low dependency at the point of significant maturity.
These options are:
A low-risk fast-track approach signed off by TPR
A bespoke route that allows the scheme to take more risk
What course do pension schemes expect to take?
Pie chart showing the proportion of respondents aiming for a fast-track approach when the new regime first applies:
Probably yes = 37.3%
Probably no = 18.4%
Don’t know yet = 27.2%
Need for information to decide = 17.1%
About one-third of participants who voted expected to opt for fast track and almost one in five had bespoke in mind. The number of schemes targeting fast track is possibly more than the industry was expecting. This suggests a significant majority of UK pension schemes may voluntarily adopt lower-risk strategies to minimise the chances of TPR involvement in their valuations.
However, schemes shouldn’t fixate on the apparent attraction of fast track over bespoke. TPR’s requirements are unchanged: you need a clear journey plan specific to your scheme and a funding strategy to realise that plan. Don’t let the tail wag the dog.
TPR’s consultation on its draft code raised concerns that the fast-track option would mould behaviour. A particular issue was that sponsors might use fast track to argue for a low-dependency target whereas trustees might not agree
TPR has adjusted its approach to fast track.
David said TPR had adjusted its approach in light of views raised in the consultation. His main points were:
- Fast track is not a benchmark or a zero-risk journey; it is a tolerated-risk journey and should not be treated as an ultimate goal.
- TPR sees fast track as a way to filter out schemes that are in good shape and concentrate on schemes taking the bespoke route.
- It may be appropriate for DB schemes to set a funding target that is above the fast track — for example if the covenant is under stress.
- If schemes are well ahead of the fast-track, TPR would like them to proceed towards a smooth resolution but some may choose to ease off.
Assessing your scheme against fast track may be a useful exercise but there is nothing wrong with the bespoke route. If a small adjustment to your strategy helps you qualify for fast track, that’s fine. But TPR wants to see a journey plan that allows member benefits to be paid and the scheme resolved.
If that means a higher-risk strategy then the regulator wants to know and work with you. If you have done the right things and documented your decisions, there shouldn’t be a problem.
Many pension schemes have yet to decide
It’s no surprise that the largest proportion of schemes in our poll were unsure of the path they would take. Schemes don’t yet have a clear idea of what is entailed by opting for bespoke.
David calmed concerns that schemes might not have enough flexibility over the course of their journey plan. TPR will leave room for trustees to deviate from the course agreed with the employer if, for example, the covenant comes under stress.
Complying with the code will create extra administration that will affect smaller DB schemes disproportionately. The good news is that TPR plans to invest in a technology platform to minimise the burden and make submission of data as easy as possible.
Wherever you are in deciding on your approach, you should seek advice to judge the level of risk that is right for your scheme. If you have lots of work to do, in David’s words: “It’s time to get on board.”
Before you access this page, please read and accept the terms and legal notices below. You’re about to enter a page intended for sophisticated, institutional investors only.
This content is provided for informational purposes only. The information provided does not constitute, and should not be construed as, an offer to sell, or a solicitation of an offer to buy, any securities, or an offer, invitation or solicitation of any specific products or the investment management services of Mercer, or an offer or invitation to enter into any portfolio management mandate with Mercer.
Past performance is not an indication of future performance. If you are not able to accept these terms and conditions, please decline and do not proceed further. We reserve the right to suspend or withdraw access to any page(s) included on this website without notice at any time and Mercer accepts no liability if, for any reason, these pages are unavailable at any time or for any period.