The Department for Work and Pensions (DWP) and The Pensions Regulator (TPR) have been encouraged to give “urgent attention” to addressing industry concerns around the draft defined benefit (DB) funding regulations.

LCP partner, Jon Forsyth, identified six particular areas of concern, emphasising that there is still time for aspects of the underlying draft regulations to be changed.

In particular, Forsyth raised concerns over the level of flexibility allowed in the regulations, which require all schemes to reach low dependency by the time they are ‘significantly mature, noting that while TPR has tried to be flexible in its code, this cannot be flexed if it is written into the law without exception.

Industry experts have previously highlighted concerns in this area, warning that a “lingering lack of flexibility in the overall regime” was concerning, and may lead to increased costs for sponsors and hinder innovation.

However, Forsyth also raised broader concerns around the lack of a transition period, as well as the lack of clarity on recovery plans, arguing that there is there is no clear definition of what this means in practice for employers.

In addition to this, he warned that the rules around investment strategy for mature schemes could result in a heavy movement of pension fund investments into a limited range of assets over a relatively short time frame, which could in turn expose schemes to systemic risks of the sort that regulators are keen to avoid.

The use of duration as a measure of maturity may also be a cause for concern, as Forsyth argued that the way in which this figure is measured can create "highly volatile results", that could make it impossible for a scheme to make stable and predictable funding and investment plans.

He also reiterated LCP's previous concerns around the lack of attention on climate risk, which the firm previously highlighted as a "glaring omission" in the regulator's code.

Forsyth stated: “After years and years of white papers, acts of parliament and consultations, you would hope that DB schemes and their sponsors would now be clear about the new funding regime and able to plan accordingly.

“TPR’s code now seems close to a finished product, but there is a clear shopping list of issues still to be resolved in DWP’s regulations.

“DWP and TPR must give urgent attention to addressing these concerns to avoid the risk of imposing a potentially flawed regime, which could inadvertently undermine the security and stability of the pension system”.

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