TPR promises to be ‘reasonable’ over funding code

The new code will replace the existing rulebook once it has been scrutinised by a parliamentary committee and signed off, a process that typically takes 40 days.

This will bring the code’s effective date up against the 22 September implementation date for the connected DB scheme regulations that were signed off by parliament earlier this year.

Some schemes with valuation dates immediately after 22 September may find themselves effectively ‘in between codes’ – operating under the old code but with the new one coming into force mid-valuation.

This potentially includes hundreds of schemes with valuation dates at the end of the third or fourth quarter of the calendar year.

The Pensions Regulator (TPR) said these schemes “can use the new DB funding code as the base for their approach”. The regulator will contact affected schemes and “take a reasonable regulatory approach”, it added.

Neil Bull, executive director of market oversight at the Pensions Regulator, said: “Today marks the final step in realising a new DB funding code that reflects the changing DB landscape.

“The DB funding code strikes the right balance between security and flexibility for scheme specific funding and investment approaches in the interests of members and employers.”

A balanced approach

Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association (PLSA), highlighted that TPR had taken a “balanced” approach to the final code given the significant improvements in funding levels since the new code was first drafted.

He welcomed greater flexibility around aspects such as low dependency investment allocation. This governs how TPR will assess the investment mix of schemes aiming for low dependency on sponsor contributions. Dabrowski said the regulator had provided “greater clarity and flexibility” around definitions and testing plans.

“Also very important, the final draft code recognises the unique characteristics of open schemes,” Dabrowski added. “TPR has provided greater flexibility for trustees to take account of future accrual and new members for a longer period when determining the future maturity of the scheme.

“This prudently reduces the liabilities of open schemes compared to an equivalent closed scheme. TPR has also helpfully included a new open schemes module signposting the code guidance and expectations for open schemes.”

Almost there

Pauline McConville, senior consultant at XPS Group, said the delays to the funding code had been “a blessing in disguise”, as they meant the code now reflected the pensions landscape in the wake of the 2022 gilts crisis and the Mansion House reforms.

It also took into account alternative options for DB schemes such as running on and surplus creation, as well as the emerging superfunds regime.

“Given these seismic shifts in the pension scheme landscape and outlook, perhaps the interminable wait for the new funding regime to become effective isn’t such a bad thing,” McConville said.

“If it had come into force a couple of years ago, before these developments, the first pension schemes obliged to adhere to it may have found their chosen strategy to have become obsolete or unfavourable rather quickly.”

She added that trustees also faced a less pressured environment for making strategic decisions.

Some elements of the new regime are still to be finalised, including guidance on employer covenant and the format of statements of strategy, a new requirement.

Mark Tinsley, principal and senior consulting actuary at Barnett Waddingham, said the cost of compliance was a concern, and called for TPR to reduce the compliance burden for schemes, particularly in relation to the statement of strategy.

Rob Archer, head of actuarial services at TPT Retirement Solutions, said increased compliance costs “could be a catalyst that encourages trustees of these schemes to look to buyout, or to consolidate into a master trust or superfund”.

Tinsley added that regulatory certainty presented an opportunity for schemes to review strategies and objectives, particularly if they are close to full funding.

“Reassessing the full range of options is particularly important for the large number of schemes who are already, or will soon be, fully funded on a buyout basis – deciding who benefits from the existence of a surplus is the most crucial decision trustees and sponsors will ever make,” he said.

Iain McLellan, director at Isio, said the final code showed that the regulator and government had listened to feedback and “smoothed some of the new regime’s harder edges”.

“These welcome changes can be clearly seen throughout the final code in the shift away from fixed rules and back towards a principles-based approach,” McLellan said. “This should allow trustees and scheme sponsors the flexibility to properly reflect their scheme’s particular circumstances in their funding and investment plans.”