The Department for Work and Pensions (DWP) has faced further pressure over the need to ensure that the new Defined Benefit Funding Code regulations are suitable for open pension schemes and don't "undermine" recent funding improvements.

The Work and Pensions Committee (WPC) previously raised concerns that the current approach is not sufficient to allow open schemes to thrive as part of its inquiry into liability-driven investment (LDI), urging the DWP and The Pensions Regulator (TPR) to “halt” their existing plans.

Pensions Minister, Laura Trott, subsequently confirmed to the WPC that the government was looking to consider the committee's recommendations, with hopes to share an update in 'autumn'.

Following on from this, WPC chair, Stephen Timms, has written to Trott, to seek further clarification on the government's plans to ensure the regulations are appropriate, arguing that there are "important reasons to justify a different approach for open schemes".

In his letter, Timms noted that, in November 2020, then Pensions Minister, Guy Opperman, told the committee that “open schemes with a strong sponsoring employer that are immature and have managed their risk appropriately should not be forced into an inappropriate de-risking journey".

However, Timms argued that evidence received by the WPC suggested the government "has not effectively delivered on this commitment in the draft guidance".

In particular, the minister raised concerns that the draft proposals could exacerbate existing trends for scheme closures and difficulties supporting the government’s growth agenda, stating that it is "clear" from evidence to its current inquiry on DB schemes that these concerns persist.

"A core concern with the current proposals is the requirement on open schemes to define and fund towards a target of having low dependency on the sponsoring employer, even when they are not expected to mature in the foreseeable future," he continued.

"This would require them to de-risk, increasing the cost of ongoing DB accrual unnecessarily, potentially making it more expensive for employers (and in shared cost schemes, such as the railways’ and universities’ schemes, also employees). This could have the effect of accelerating scheme closures."

Given these issues, Timms argued that there is a "compelling reason" to revisit the proposals to ensure they are appropriate for the circumstances of today, pointing out there has been a improvements in aggregate DB scheme funding since the inception of the policy in 2016.

In addition to this, he pointed out that the cost of building up new benefits in a DB scheme has fallen, by around 5 per cent, from 20–25 per cent to 10–15 per cent.

Timms argued that this therefore provides a "new and more favourable environment" in which it is easier for employers to keep schemes open, warning that this should not be "undermined" by a new funding regime which increases costs unnecessarily.

The letter identified two specific changes that would help address these concerns: Explicit and separate reference to the requirements on open schemes in both regulations and the DB Funding Code; and removing the requirement for open schemes to fund and invest towards a position of low dependency on the employer.

Timms also acknowledged that some witnesses have told the committee that more is needed: for example, that The Pensions Regulator (TPR) should have a new objective to have regard to future build-up of benefits rather than just to protect benefits already built-up.

He also reiterated the committee's recommendation from its recent liability-driven investment (LDI) report, to publish a full impact assessment of the current proposals, including the impact on financial stability and on open DB schemes.

"This is still needed to allow a more fundamental review of the policy, which we heard many are concerned will increase ‘herding’ in investment strategies," he stated.

However, progress may be underway, as the Universities Superannuation Scheme (USS) recently said that it was "optimistic" about the new DB Funding Code.

The USS had previously raised concerns in this area in response to TPR's consultation on the draft code, with particular worries that the code lacked recognition of the special characteristics of open DB schemes, especially their longer time horizons.

However, speaking at a recent briefing on the scheme's 2023 valuation, USS chief scheme strategy and stakeholder officer, Mel Duffield, said that the trustee is felling "optimistic" about the new DB Funding Code.

"We put forward some specific asks [in our response to the regulator] and we did have a helpful response from the regulator that committed to recognising the special circumstances of schemes like USS.

"So we are optimistic, but obviously there's quite a lot of speculation as to when those regulations will become available. So it's a bit of a watch this space for us."

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