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New regulations mark ‘major milestone’ in ‘long and winding road’ to new funding framework for DB pension schemes

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The publication today of proposed new regulations on the funding of DB pension schemes marks a ‘major milestone’ on the journey to a new regime, first flagged in the 2017 Conservative Manifesto and a 2018 White Paper “Protecting Defined Benefit pension schemes”, according to consultants LCP. 

These plans were in large part in response to widespread public concern arising from shortfalls in household name pension schemes such as BHS and Carillion, the latter ending up in the Pension Protection Fund.

Today’s regulations arise from the Pension Schemes Act 2021 and provide the legal backing for a proposed new framework for regulating DB pensions.  They pave the way for the publication of a separate consultation by the Pensions Regulator (TPR) on the proposed DB funding code, likely to come into force in late 2023 or early 2024.

Under the new regime:

  • All schemes will need to set out their ‘long term objective’ – for example to buy out their liabilities with an insurer, to run on with ‘low dependency’ on sponsor support, or to transfer assets to a pension superfund;
  • All schemes will need a ‘journey plan’ to get to their long-term objective, based on a realistic assessment of the ‘covenant’ (financial support) provided by the sponsoring employer in backing the scheme

What has been published today marks a considerable evolution from original ideas floated by DWP and TPR, which could have landed employers with multi-billion pound bills in additional contributions arising from more aggressive schedules to deal with historic deficits. In particular, DWP is clear that it wishes to retain a scheme specific funding regime with flexibility where appropriate – though we must wait for TPR’s code itself before we see just how much flexibility there will be.

Today’s regulations include:

  • New rules on the funding and investment strategies which schemes must adopt, requiring much greater transparency, monitoring and review;
  • A requirement that schemes must achieve a state of “low dependency” on the employer in terms of both investment and funding strategy by the time “significant maturity” is reached – and new rules on setting such strategy and on monitoring progress towards it;
  • A requirement that the ‘recovery plan’ for schemes which are under-funded must be set such that a deficit is removed as soon as an employer can reasonably afford – this is tougher than under the existing regime, and may have significant consequences for employers. However, there is little detail on what this means in practice, with this presumably to come in the Code itself.
  • For the first time, new and detailed rules on measuring the strength of the employer covenant on which we are expecting TPR to build extensive guidance.

The regulations are silent on the expected “fast-track” and “bespoke” routes which are expected to form the basis by which schemes can demonstrate compliance with TPR’s new funding code.

Commenting, Jonathan Camfield, partner at LCP, said:

“These regulations mark a welcome milestone in the long and winding road towards a new framework for the funding of DB pension schemes.  The world has changed a great deal since these ideas were first proposed and we welcome the fact that consideration has clearly been given to this, as well as concerns raised by the industry.  But we are still some way from a finished product.  Once these regulations have been finalised, the way will then be clear for TPR to publish its second Funding Code consultation which will show in detail the extent to which Government and Regulators have listened to industry concerns about the potential rigidity of what was proposed.  Trustees and sponsors should already be preparing for this new world, with a particular focus on long-term journey planning and a deep understanding of the strength of the ‘covenant’ of the sponsoring employer. Nonetheless, today represents an important step forward”.

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