The pensions industry has broadly welcomed the publication of The Pensions Regulator’s (TPR) draft DB Funding Code, but some have questioned whether the level of regulation is proportionate amid healthy DB funding levels.

In response to the draft code, Pensions Management Institute director of policy and external affairs, Tim Middleton, said the institute was “greatly encouraged” that the new code addresses the key issues affecting DB schemes.

“Trustees now have clear guidance concerning the development of a route to full funding which fully recognises the importance of the employer covenant in achieving independence,” he continued.

“The clarity of guidance will greatly encourage trustees as they manage a complicated task in a time of particularly volatile economic conditions.”

However, Isio head of research and development, Iain McLellan, said while the flexibility in the code would be welcomed, it begged the question of why so much detailed regulation was needed if it will have little impact.

“This seems to run counter to the general thrust of the government’s de-regulation agenda and Hunt’s commitment to delivering ‘agile and proportionate’ regulation as part of the Edinburgh Reforms,” he added.

“It is unclear why the noose is tightening on DB schemes whilst insurers, for example, get more flexibility.

“Most pension schemes have never been better funded, the PPF is running a huge surplus and most schemes are within 10 years of being able to buyout. Looking at the complex draft funding code in this light doesn’t feel proportionate and it now reads like a solution looking for a problem.

“The rules should be more targeted and directed at poorly-run schemes, so that well-run schemes can get on with securing members’ benefits without distraction by more well-meaning but inconsequential regulation.”

Barnett Waddingham partner, Paul Houghton, commented that while many schemes were well-positioned to comply with the code, a “lingering lack of flexibility in the overall regime” was concerning, and may lead to increased costs for sponsors and hinder innovation.

“The core principle underpinning the new funding requirements is that maturing schemes should have long-term funding and investment strategies that are suitably low risk,” he said.

“This is a sound approach to risk management and is already adopted by most DB pension schemes. However, the DWP’s draft funding regulations – on which the draft code is based – are too prescriptive in setting out how schemes must comply with this requirement.

“TPR’s draft code provides welcome clarity on their interpretation of these regulations, and alleviates these concerns to some extent, but it remains to be seen whether the final regulations, and therefore TPR’s code, will ultimately be adapted to give DB schemes and sponsors appropriate flexibility whilst still ensuring the security of members’ benefits.”

Association of Consulting Actuaries (ACA) chair, Stven Taylor, described the scale and ambition of the proposals as “admirable”, and stated that the association agreed with the core principles.

“However, a key test for the new code will be how it enables the continued smooth transition of DB schemes to their endgames without disrupting well-planned scheme-specific approaches, or introducing new hurdles or compliance costs,” he commented.

“Within the detail of the code itself, it will also be important to closely examine the read across to DWP’s regulations as, unusually, these are expected to continue to evolve in the New Year.

“The ACA would like to see less prescription in DWP’s final regulations, to ensure that TPR’s vision for scheme-specific bespoke funding is viable in practice.”

Cardano Advisory managing director, Emily Goodridge, noted that while it was positive TPR was looking at covenant over a scheme’s journey plan, the firm has reservations about a “relatively prescriptive one-size-fits-all” approach to assessing supportable risk.

“There is a risk of mixed messaging,” she warned. “On the one hand, covenant is seen as key to supporting scheme risks over a journey plan and on the other hand, the parameters to satisfy the ‘fast track’ regulatory channel do not include any covenant metrics.

“Trustees should focus on the expectations set by the draft regulations and draft funding code, and not just on whether TPR will check up on them.”

LCP partner, Jon Forsyth, said the publication highlighted the need for the DWP’s regulations to catch up with TPR’s thinking.

“Just a few months ago, DWP published proposed rigid new rules which would have forced all schemes into a straitjacket, required many sponsoring employers to put more money into their pension schemes, and could have resulted in dozens of sponsoring employers being forced out of business,” he continued.

“By welcome contrast, TPR has come up with a more pragmatic package, allowing some schemes to continue to take investment risk for much longer where appropriate, and indicating that recovery plans of up to six years might be acceptable even if employers can afford to pay off deficits quicker than that.

“But this doesn’t fit with the draft regulations, and we’d urge TPR and DWP to work closely together over the coming months to ensure TPR’s more pragmatic approach is reflected in the final regulations.”

Others in the industry, such as ECPA chair, Karina Brookes, and PwC head of pensions funding and transformation, John Dunn, welcomed the decision to de-link fast track and bespoke, and to keep fast track filters separate from the code, respectively.

Meanwhile, Broadstone chief actuary, David Hamilton, warned that the code represented a “serious challenge” for smaller schemes.

“Whilst TPR does make reference to proportionality, except for a few specific items for very small schemes, it seems that this flexibility will only begin at a point when a significant amount of additional analysis and work has been undertaken,” he said.

“The cost burden (which also needs to be built into valuations going forward) will be significant and as plans (and economic circumstances) evolve, it will be interesting to see how much of this additional planning delivers long term value.

“Those with schemes with less than 100 members will be relieved to see exemptions from some of the onerous areas but we would rather see such explicit flexibility set out within the full code, rather than the supplementary fast track guidance, to avoid confusion.”

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