Key points:
- Nominally funding is still to be scheme specific but the rules are tightened particularly for mature schemes;
- Removing deficit as soon as the employer can reasonably afford may become key; and
- Measuring the employer covenant is to be more highly regulated.
Context
On 26 July 2022, the DWP launched a second consultation for the proposed detailed new legal framework for the funding of DB pensions. Following concerning shortfalls in pension schemes such as BHS and Carillion, the Pension Schemes Act 2021 paved the way for a tighter funding regime. The present consultation invites comments on proposed detailed amendments to the Occupational Pension Schemes (Scheme Funding) Regulations 2005 (the “2005 Regs”). The Pensions Regulator (“TPR“) intends to launch its second consultation on its Funding Code of Practice (the “Code“) later this year. This timeline suggests the amended Regulations and the Code may take effect in late 2023.
At this juncture it may be timely to set out for trustees and industry practitioners alike: what might actually change (part 1 below) and would the result be a Dog’s Dinner or useful (part 2 below)?
Part 1 – What changes ?
Chairs for DB schemes
Under the DWP’s proposals, draft regulation 17 of the 2023 Regs requires chairs of trustee boards to sign off schemes’ statements of funding and investment strategy. This places a particularly high onus on Chairs of DB schemes. DC schemes have been producing Chair Statements for many years whereas DB schemes have not. DB schemes would need to appoint a Chair in rare instances where they do not already have one.
Scheme maturity
DWP’s first consultation in 2021 required that schemes achieve a state of ‘low dependency’ on the employer in terms of both investment and funding strategy by the time ‘significant maturity’ is reached. TPR’s first consultation on its code suggested that schemes reach significant maturity when their liabilities reach a duration of 12 to 14 years, whereas DWP expects that TPR’s second consultation will set an objective of 12 years – representing a tougher stance. Schemes will need to set a date, being a date not later than the end of their relevant scheme year, in which they expect the scheme to reach ‘significant maturity’ and ‘low dependency’ on the employer.
Deficit removal
Draft regulation 20(8) of the 2023 Regs specifies that the ‘recovery plan’ for schemes in funding deficit must be set so that a deficit is removed ‘as soon as an employer can reasonably afford.’ This is more arduous than the existing regime – under the 2005 Regs trustees must prepare or revise a ‘recovery plan’ following an actuarial valuation if the scheme is in deficit. Regulation 8(2) of the 2005 Regs prescribes matters which trustees must take into account in preparing the same, but the ultimate call is in statutory terms left to scheme trustees. In its July 2022 consultation, DWP asks whether the proposed new factor ‘as soon as an employer can reasonably afford’ should take precedence over all the other factors.
This amendment does not seem to address the potential contradictions associated with (i) the benefit of holding growth assets for the long term; (ii) the new emphasis on employer covenant versus the prevention of overfunding of schemes; and (iii) higher funding targets (and by extension trustee prudence) versus an employer’s commercial focus at a time of economic turbulence. It will be interesting to see the results of TPR’s consultation on the Code in the autumn. No matter how much is put in legislation, ‘as soon as an employer can reasonably afford’ may well largely remain an art and not a science.
Multi-employer schemes
Draft regulation 20(9) of the 2023 Regs extends the existing provisions in Schedule 2 to the 2005 Regs – so that where legislation treats individual sections of a multi-employer scheme as if they were separate schemes for the purposes of the 2005 Regs, they will be treated analogously for the purposes of the 2023 Regs. For example, where an actuarial valuation is needed for an individual section of a multi-employer scheme, a funding and investment strategy and statement of strategy will now be required for each individual section.
Statements of strategy
Part 1 of the Statement must set out the funding and investment strategy itself, and Part 2 is to contain a deeper analysis of the strategy and how it is working (or not working) and must also cover the (present) 19 points listed in the proposed amending Regulations (Regulation 14 and Schedule 2 to the Amending Regulations).
Part 2 – Problematic areas
In the foreword to the July 2022 Consultation, the Pensions Minister says:
“The intention is to have better, and clearer, funding standards but not to move away from the strengths of a flexible scheme specific approach.” Some thoughts on whether the proposed amending Regulations achieve this:
| Impact of the amending Regulations | Analysis |
| Overlaying the existing funding requirements | Schemes and their advisors are used to the existing regime. The Minister acknowledges that the ‘majority of schemes are well run.‘ Our comment: the proposed overlay is very substantial and perhaps overkill. |
| New regime too detailed? | Arguably yes. The additional funding and investment strategy has to be designed within the required parameters and must be evidenced not only in actuarial valuations but also in a stand-alone ‘Statement of strategy,’ the content of which is heavily prescribed. |
| What is the upshot? | Schemes will suffer from overload. Much the same information will have to be repeated in numerous places, e.g. in actuarial valuations, annual reports, statements of funding principles, statements of investment principles and statements of strategy. Saying more or less the same thing over and over again in numerous documents tends to be counter- productive. |
| Other concerns | The proposed amending Regulations anticipate that the choice of duration of liabilities will be solely within TPR’s power under TPR’s proposed new Code of Practice – some legislative control would be appropriate. |
What next?
The DWP’s Consultation on the proposed amending regulations closes on 17 October 2022 and there are bound to be many comments. We anticipate government will respond in Q1 of 2023. Ultimately, there is vast detail to come in the Code itself, with much being left to TPR’s discretion rather than perceived as a matter for regulation – one to watch. If all goes according to plan, the amending Regulations and the new Code are expected to take effect in Q4 2023. A long haul – let us hope the finished product is good and not a Dog’s Dinner.