The Pensions Regulator (TPR) will now seek to publish the first of two consultations on a revised defined benefit (DB) funding code in the new year, depending on the political environment.
Speaking at the Pensions and Lifetime Savings Association (PLSA) conference on Friday (18 October), the regulator’s executive director for policy, analysis and advice, David Fairs, said the upcoming regime was seeking to balance a prescribed approach with enough flexibility.
The code was first announced in the government’s DB white paper in March 2018, and there had been plans to publish the consultation this summer. The delay in the publication of the pension schemes bill amid wider political stagnation means it is now unlikely to be released until after Christmas.
Fairs said if it were not for Brexit and the potential for a new general election, “we’d probably publish very soon”.
“We’d always intended to publish shortly after the bill was introduced in the house,” he said. “Where we are politically, I’m not sure what the right time to publish will be.
“We’re thinking January next year, when things might have settled down.”
The two-part consultation will propose a dual-route approach for regulation of DB funding arrangements: Fast-track for schemes seeking direction from TPR, and bespoke for those wanting to retain flexibility in the system. Fairs said it would be up to schemes to decide which approach to use, noting both were “satisfactory” and “each approach is equally valid”.
Under the fast track approach, TPR will expect schemes to target low dependency on their sponsoring employer by the time they reach maturity. Schemes will also be tested on whether they are “taking excessive amounts of investment risk” but will otherwise face less regulatory scrutiny.
On the other hand, the bespoke route will give schemes flexibility to set the lengths of their recovery plan and vary the amount of investment risk. Fairs said the regulator would “expect them to justify that” with the regulator looking at proposals “in much more detail”.
TPR expects the fast track route to be especially attractive for smaller schemes that have limited resources.
The proposals have been designed in consultation with a panel of nine experts, and the regulator is also considering whether covenant should be considered as part of the fast track route.
There is a concern that, without including covenant, sponsors may say they are not as strong as they are and “manipulate the system” in order to reduce their annual contributions, Fairs said.