• Effective date for the Strategy Requirements remains uncertain – may be October 2023
• Will probably apply only for Valuations with “as at” dates on or after October 2023;
• Covenant strength and measuring explicitly legislated for; and
• TPR’s Fast Track for Valuations is TPR ‘homegrown’ – not in the proposed Funding Strategy Regulations, nor largely in TPR’s proposed DB Funding Code of Practice.
Following the problems with the BHS scheme and other schemes in 2016 and later, the Government decided to tighten DB Schemes’ approach to funding, scheme investment and covenant. Some five years later this is reflected in Pension Schemes Act 2021. However, these provisions are still not in force as they depend on:
- the Funding Strategy Regulations being made; and
- TPR’s revised DB Funding Code of Practice.
State of Play
Usually Codes of Practice ride on the back of Regulations. However, the path here has not been smooth and the current position is:
|Funding Strategy Regulations
|DWP Consultation Period
|July 2022 to October 2022
|Possibly from 1 October 2023
|TPR Code of Practice for DB Funding
|TPR Consultation Period
|Code of Practice
|December 2022 to March 2023
|Possibly from 1 October 2023
The DWP’s 2022 draft Funding Strategy Regulations were criticised and are expected to be revised before coming into force.
TPR’s December 2022 Consultation on its Code of Practice is more flexible than the Code it first consulted on in March 2020. TPR intimates that DWP’s Funding Strategy Regulations will reflect TPR’s more flexible stance but whether this is so remains to be seen. When determining whether relevant legal requirements are met, a Court is entitled to take any relevant Code into account. So it is important that new Code and the proposed Funding Strategy Regulations dovetail.
The meaning of employer covenant, and measuring it, are for the first time to be legislated for in detail in the proposed Funding Strategy Regulations.
Employers and trustees are used to assessing employer covenant but without a detailed legislative framework. Whilst the proposed legislative provisions are likely to reflect much of current methodology, there will also be new requirements for trustees and employers to get to grips with.
The relevant provisions of Pension Schemes Act 2021, the proposed Funding Strategy Regulations and the new DB Funding Code of Practice (together the “New Strategy Requirements”) will extensively affect scheme trustees’ legal duties in setting their funding and investment strategy, their valuation technical provisions and any recovery plan and conducting covenant assessment, both prior to and on and after the DB scheme reaching “significant maturity”. Our article in September 2022 Pensions Compass summarises some of the changes (Click here).
Scheme trustees’ current obligations in these areas remain under existing legislation until such time as:
- The New Strategy Requirements are brought into force (“Effective Date”), may be on 1 October 2023; and
- The scheme reaches its First Valuation “as at” date on or after the Effective Date.
In summary, scheme trustees need to understand their prospective new legal obligations under the New Strategy Requirements, but also need to remember the Requirements are work in progress and meanwhile scheme trustees’ existing obligations under Pensions Act 2004 continue.
TPR’s Fast Track for certain valuations
Considerable comment in response to TPR’s separate December 2022 Fast Track Consultation can be expected. The finalised Fast Track could differ substantially from the December 2022 Consultation version.
Fast Track is a TPR inspired process outside the proposed Funding Strategy Regulations and largely outside the proposed Code of Practice. This will make the Fast Track rules easier for TPR to amend going forward.
This article puts the New Strategy Requirements in their procedural context, to help scheme trustees comply with their statutory duties of knowledge and understanding.
If you have any queries on this article, please be in touch with us.