Pension professionals demand pause to TPR’s tough stance on funding

The colossal aggregate defined benefit deficit, which stood at £168.2bn at the end of October, shows the size of the DB problem.

The Pensions Regulator issued lengthy guidance to trustees on dealing with sponsors in distress on Thursday. But a survey of pension professionals conducted before the new publication stressed the need for more concrete action to protect affordability, rather than just clarifying best practice when a sponsor nears insolvency.

Although many of the principles may still hold true, TPR needs to consider carefully how they are applied and how much strain its new approach may place on sponsors whose businesses are reeling from the impact of Covid-19

Samantha Brown, Herbert Smith Freehills

Flexing rules to make life easier for employers could make member benefits less secure. But according to 67 per cent of those attending a recent Herbert Smith Freehills DB webinar, the regulator must focus more on the sustainable growth of scheme sponsors as it did in the aftermath of the 2008-09 financial crisis. 

In the wake of Covid-19, just one in five respondents (21 per cent) backed the continuance of the regulator’s existing “clearer, quicker, tougher” approach.

“Something different is required now,” said Steve Webb, partner at LCP. He said TPR’s framework for a new two-tier funding code, developed in reaction to the collapse of household names as far as four years ago, has been overtaken by coronavirus and its trail of destruction.

There is still time to change the regulator’s strategy. David Fairs, executive director for regulatory policy, analysis and advice, confirmed in a recent blog: “We have not yet set the parameters or metrics for fast-track. Although it is a more prescriptive route to compliance, it will lessen the amount of explanation and documentation that trustees will need to give us.”

Helping corporates out of crisis

Almost three-quarters of pension professionals (73 per cent) are urging the regulator to introduce short-term easements into the parameters for the fast-rack regime for the next valuation cycle, with 53 per cent suggesting that TPR should not use fast-track as the yardstick for measuring bespoke arrangements.

Samantha Brown, partner and head of Herbert Smith Freehills’ UK pensions practice, said: “Although many of the principles may still hold true, the regulator needs to consider carefully how they are applied and how much strain its new approach may place on sponsors whose businesses are reeling from the impact of Covid-19.”

The DB world is highly diverse, covering open and closed schemes, those sponsored by not-for-profit organisations and by multinational corporations, and of a huge variety in size.

Sir Steve pointed out: “This means that any funding approach needs to be sufficiently flexible to be appropriate in all of these different situations. What the regulator has proposed to date is too rigid to pass that test. Bespoke really needs to mean bespoke.”

Funding parameters not set

There is some hope for sponsors and trustees. Graham McLean, head of DB funding at Willis Towers Watson, said the regulator is likely to water down the strict parameters it has floated so far, although he noted an air of uncertainty: “Oddly, the government has more or less finished getting legislation through parliament without saying whether its intention is that employers should typically pay more, less or about the same as they would have done under the current rules.”

Commenting, a spokesperson for TPR said: “Our 2020 consultation focused on high-level principles and set out options for how they could be applied in practice. We have not yet set fast-track guidelines — these will be developed taking into account responses to our first consultation, legislative developments, an impact assessment and prevailing market conditions and will be consulted on in 2021.” 

The watchdog has been criticised in the past for being slow to act and unbending in its approach. 

“There is a real opportunity here for it to be a regulator that is fit for purpose, and which shows itself able to partner with sponsors and schemes in a way that contributes to — or at the very least, does not hamper — the recovery of those employers in the long-term interests of the schemes, their members and the Pension Protection Fund,” Ms Brown said.

Peter Murphy, partner at Sackers, agreed: “Where employers are struggling it’s right to give them some extra breathing space, but where employers are not treating pension schemes equitably alongside other creditors and stakeholders, or are improperly jeopardising savers’ pensions, TPR should still be tough.”