The Department for Work and Pensions (DWP) has published the final Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024, which are set to come into force from April 2024.

The final regulations set out the requirements for defined benefit (DB) pension schemes when determining their funding and investment strategy and statement of strategy, and will apply to scheme valuations from September 2024.

Industry experts previously raised concerns over a potential mismatch between the DB regulations and The Pensions Regulator's (TPR) draft DB Funding Code, with particular concerns raised around the level of flexibility and considerations for open DB schemes.

However, the DWP's latest update confirmed that it has revised the regulations to ensure it struck the right balance between member security and employer affordability, while supporting flexibility for sponsors and trustees on how legacy DB liabilities are managed.

In particular, the DWP confirmed that it worked closely with TPR to explicitly anchor the flexibilities described in the draft code in the final regulations to put the matter “beyond doubt”.

In addition to this, the updated regulations include some scheme specific flexibilities, making the flexibilities that were intended within the draft regulations clearer, such as the fact that the regulations do not constrain actual investments and even mature schemes can invest in a wide range of assets.

It also provided assurance that the investment in the sustainable growth of sponsoring employers’ businesses is a matter to consider alongside the affordability principle, and made it explicit that open schemes can take account of new entrants and future accrual when determining when the scheme will reach significant maturity, as previously confirmed by the Pensions Minister.

The revised regulations also aim to make long-term planning and implementation easier and avoiding unnecessary administrative burden by giving TPR the flexibility to ask for less detailed information in some cases, depending on the circumstances of the scheme.

The DWP acknowledged that there were also concerns around the timing of the implementation of the new regime.

However, it argued that applying the new code to valuations with effective dates on and after 22 September 2024 will give the pensions industry sufficient time to prepare before the requirements take effect.

The government response stated: “We do not think introducing a transitional arrangement would be necessary. Schemes will have 15 months from the effective date of their valuation to agree a new funding and investment strategy and any recovery plans.

“As our analysis set out in the Impact Assessment document indicates, a significant number of schemes will not have to comply with the new arrangements until 2027 or when their valuations are due, and most schemes will not need to make radical changes to their existing arrangements as there is significant flexibility built into the regulations.”

Further changes to TPR's DB Funding Code could lie ahead though, as DWP confirmed that the regulator will be reconsidering their Fast Track parameters in light of the consultation responses and the changes in market conditions since their original analysis was done.

This will be published alongside the final revised DB Funding Code.

Commenting in the foreword of the government response on the regulations, Pensions Minister, Paul Maynard, stated: “I would like to thank all the pension scheme trustees, sponsoring employers and other organisations who responded.

“With your help we have improved the draft regulations so that they can work effectively with the regulator’s revised code for the full range of private sector DB schemes. These regulations strike a fair and lasting balance between security for members and affordability for sponsoring employers as the economic context evolves.

“As the government presses on with its productive finance agenda, I have been encouraged by the helpful engagement we have had from stakeholders. It was never our intention to bear down on risk taking across the board.

"Rather it was to make funding standards clearer and to promote planning for the long term. By listening to stakeholders, we’ve learned that it is easy to inadvertently drive reckless prudence and inappropriate risk aversion.

“That is why we have made changes to make the regulations explicitly more accommodating of appropriate risk taking where it is supportable, and to increase the scope for scheme specific flexibility. This will support trustees in reacting to changing circumstances and investing appropriately in the best interests of their members.

“The regulations will embed existing good practice, by clearly defining how the metrics set out in the Pension Schemes Act 2021 will be applied. This will enable The Pensions Regulator to intervene more effectively where things go wrong.

“But more importantly, they set a clear framework to support sponsors and trustees in getting it right. In a world where most schemes are closed it is more important than ever that sponsors and trustees are working together and planning for the long term. These regulations support them in doing that."

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