The new funding regime for DB schemes requires trustees and employers to target low dependency when the scheme reaches significant maturity.
This goal has come up against the challenge that a scheme’s duration — the measure on which significant maturity is based — was disrupted when interest rates spiked in September 2022. Volatile interest rates, after many years of stability, make it difficult for schemes to set a clear target and timeframe.
Reassuringly, the Pensions Regulator (TPR) and the Department for Work and Pensions (DWP) are working together to ensure schemes are able to navigate this volatility. The regulations are prescriptive but as part of its funding code consultation TPR wants to make it easy for schemes to formulate plans.
That was a key message from our wide-ranging discussion with David Fairs, TPR’s Executive Director of Policy, Advice and Analysis. This is the second article based on the webinar. The first looked at the fast-track and bespoke routes proposed by TPR.
David said TPR and DWP are considering three options so that DB pension schemes can create clear journey plans and have a defined target:
- Setting a fixed interest rate for calculating duration
- Smoothing interest rates over several months
- Something different (though duration is attractive and widely understood)
In light of the market disruption, we took the opportunity to ask the webinar’s over 400 attendees when they expected their scheme to approach maturity.
5 to 10 years = 37.89%
0 to 5 years = 18.75%
Already significantly mature = 9.38%
Don’t know = 7.81%
Pension schemes should revisit expectations
However, we advise schemes to reflect on these expectations after the disruption to interest rates in 2022.
For example, a scheme whose duration was 17 years at the end of 2021 had this reduced to 13 years at the end of 2022 because of rising interest rates. This change effectively reduced the expected time to significant maturity (defined in the draft code as 12 years) by about 8 years — with implications for the scheme’s journey plan.
Most pension schemes have lots to do
25.7% felt they were on the right track already with nothing much to do until they have to comply with the documentary requirements
20.48% said they needed more information and/ or needed to do more work to understand actions
16.47% needed to agree a long term objective and/or calculate maturity
10.04% will need to revisit their investment strategy
14.46% believed they needed to consider tweaks to meet fast track in the future
7.63% stated they were going to have to embrace covenant analysis
5.22% said they will use fast track to reduce their funding commitments and/ or will need to prepare for their sponsor to use fast track to reduce funding commitments
Before publication of the final code and with certain aspects in flux, it’s unsurprising that most schemes have got plenty of work to do across a range of tasks.
If you’re one of these schemes, don’t worry. Some of the terminology may be new but TPR’s view is largely unchanged. Your task is to set a journey plan so that your members’ benefits are paid with minimal stress. As things become clearer, we are here to help.
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