The Pensions Regulator has denied a request from MPs to delay the launch of its defined benefit funding code consultation due to the recent market turmoil, justifying that the document already includes a section about systemic risk.
Work and Pensions Committee chair Stephen Timms wrote to TPR on December 7 expressing concerns that changes to DB funding set in the draft regulations published by the Department for Work and Pensions in the summer – which will be supported by the new code – “will result in intensified ‘herding’ in pension scheme investments”.
The Labour MP quoted a number of people who submitted evidence to the committee’s current hearing on liability-driven investments and DB schemes, who “believe strongly that it is important to be clear about the lessons learnt from the recent gilts crisis before proceeding”.
“I am writing now to ask you to postpone the launch of your consultation until after my committee has reported, so that you can take account of our conclusions and recommendations in your consultation,” Timms said.
We don’t anticipate there will need to be any fundamental changes to the regulatory framework set out via the regulations and the draft code
Charles Counsell, TPR
In his response letter, published on December 14, TPR chief executive Charles Counsell explained the rationale behind the new code, with its second consultation pinned to be published before Christmas.
“The underpinning principle of our revised DB funding code is that schemes should have the necessary long-term funding approach to ensure savers have the best chance of receiving the benefits they expect.”
Counsell added that “the need for long-term funding is also a key government objective”, underpinned by the consultation published by the DWP in July.
Delaying consultation would postpone code by a year
He explained that pausing the watchdog’s consultation “would have a significant impact on the timings of the new code”, delaying the implementation of the new rules “from October 2023 to October 2024”, due to the “timings of when most DB pension schemes conduct their triennial valuations”.
Counsell noted that around 75 per cent of valuations are carried out at dates between December 31 and the beginning of April, and if the finalised code was introduced in early 2024, only a quarter of valuations in that year would be done under the revised DB funding code, with the remaining three-quarters occurring under the existing code.
In September, the Bank of England announced a £65bn bond-buying programme in an attempt to stabilise markets.
This intervention followed the so-called “mini” Budget on September 23, which saw falling government bond prices prompt a series of collateral calls from DB schemes that some feared would lead to a “doom loop” that would crash the market.
Issues arose specifically around pension funds’ LDI strategies, designed to protect against falling interest rates. Most schemes had conducted stress tests for a scenario in which there was a 1 per cent rise in long-term gilt yields, but the 4 per cent increase exceeded the contingency plans of several, prompting the BoE’s intervention.
New consultation already contains changes
Counsell explained in his letter that some changes have already been made to the draft code, with TPR including “in the consultation document a new section around systemic risk, which takes into account the disruption witnessed by the financial markets in September and October”.
Pensions Expert reported on December 13 that TPR has lowered the amount of leverage that it deems acceptable for schemes to have to meet the requirements for a “fast-track” valuation.
Its previous DB funding code consultation, published in 2020, set out plans for a twin-track DB funding approach, with the aim of reducing average scheme dependency on sponsoring employers.
The new consultation on the draft code will last for 14 weeks. TPR will also publish a separate consultation on fast-track and its twin-track regulatory approach.
Schemes that choose a prescriptive fast-track funding arrangement would be subject to less regulatory scrutiny, while those opting for a bespoke arrangement would face stricter oversight.
The watchdog has considered schemes’ use of leverage, in the aftermath of the autumn liquidity crisis that gripped DB schemes. It has supported Irish and Luxembourgish regulators’ calls for larger collateral buffers across LDI mandates.
TPR is borrowing the Pensions Protection Fund’s stress-testing methodology for the fast-track process, which trustees will be expected to carry out in order to understand their schemes’ levels of investment risk, TPR executive director for policy, analysis and advice David Fairs told a Barnett Waddingham webinar.
TPR rejects claim of having pressured schemes into LDI
The Pensions Regulator has pushed back against a suggestion put to the watchdog by MPs that it pressured some pension schemes towards liability-driven investments, when they did not think LDI was appropriate for them.
In his letter, Counsell said: “To reassure the committee further, we are happy to meet to provide insight into the draft code and its aims, and to take into account the committee’s views and recommendations during the consultation period.”
However, after feedback from stakeholders, with whom TPR has been engaging since 2020, Counsell does not “anticipate there will need to be any fundamental changes to the regulatory framework set out via the regulations and the draft code, though there may be points of clarification and detail”.
“We do, however, appreciate the committee’s concerns about this issue, and if our consultation raises fundamental concerns around the framework we would, of course, consider whether a further consultation is required on the substance of the code,” he added.
