The government has been urged to provide an update on the defined benefit (DB) funding regime as a matter of urgency, after research revealed that nearly two thirds (62 per cent) of trustees don’t think the implementation date of 1 October will be easy to achieve.

The findings from the Pensions and Lifetimes Savings Association (PLSA) were published alongside its response to The Pensions Regulator's (TPR) second major consultation on the draft DB Funding Code.

The PLSA welcomed the additional flexibility in the draft code, particularly around the investment strategies which schemes can adopt and concepts of reasonable affordability.

However, the PLSA also raised some "serious concerns" around the disconnect between TPR’s guidance and the related regulations, arguing that amendments to the legislation will be necessary in advance of implementation.

Given this, the association argued that the implementation date of 1 October 2023 should be pushed back to 1 April 2024, in order to give schemes and employers the appropriate time to prepare, especially as the covenant guidance is not expected to be released until after the consultation on the code has concluded.

Sackers partner, Janet Brown, also warned that the draft code and regulations are "currently out of sync in several crucial areas", stating that unless this is addressed in the final versions, trustees and sponsors could be left in the "uncomfortable position of not knowing if the dance they are doing is in time with the underlying law (regulations)".

"As we are probably unlikely to see the regulations again before they are finalised, our hope is that the DWP will take on board the industry’s comments and will reflect the important scheme-specific flexibility in the regulations themselves clearly, even if the drafting is not so elegant," she continued.

“As regards timing, TPR’s stated intention is an in-force date for the new funding regime as early as October, which seems ambitious.

"Given other developments, there must surely be potential for this to slip, and the pensions industry would no doubt welcome an early heads-up if this is the case. Maybe we are due a reset for the new funding and investment regime?”

These concerns were shared by the Association for Consulting Actuaries (ACA), which argued that trustees and sponsors "need to be certain that following the approaches outlined in the draft code will ensure compliance with the legislation", suggesting that the final regulations should be refined to align with the flexibilities envisaged by TPR.

Indeed, LCP also argued that without swift action, the proposed implementation date for the new regime of 1 October 2023 looks "increasingly impractical and leaves schemes in ‘limbo’ as they await details of the new rules".

However, rather than a delay, LCP urged the government to publish their response and confirmation of the expected timings for the updated regulations to allow pension schemes and their sponsoring employers can plan for the future with certainty.

‘Whilst consultation is welcome, it is time for decisions to be made," LCP partner, Jon Forsyth, commented, continuing: "We hope that the delay in responding means that the Department for Work and Pensions (DWP) has listened to the criticisms that we and others have made and will come up with a set of regulations which are much more flexible than the first version.

"But the industry cannot go on waiting indefinitely. These new rules could have big implications for schemes and the firms who stand behind them, and they need decent notice of what the new rules will be and when they will be implemented.

"TPR is also in a difficult position having to wait on DWP until it can finalise its own funding code, so it is vital that DWP unlocks this legislative limbo’.

This was echoed by ACA chair, Steven Taylor, who warned that further implementation delays to the new funding regulations and code would be "unhelpful", as trustees and sponsors now need a period of certainty to be able to plan.

Creating flexibility

More broadly, the PLSA also stressed the need for the code to fully recognise that not all schemes are at the same stage of maturity, and not all employer covenants are the same.

In particular, it suggested that DB schemes should be given greater flexibility over how to define scheme maturity, over the right regulation of “duration”, as 60 per cent of trustees agree that greater flexibility will allow open schemes to take a different approach.

In addition to this, it found that a further 60 per cent of PLSA members though it would be very helpful for open schemes if all requirements relevant to them were together in one place.

In relation to the period of visible covenant reliability and the period after that, 60 per cent of PLSA members said they support the positions in the code, which allow for more immature schemes to assume higher funding levels and accept slightly more risk; and for open schemes to take a different approach if deemed appropriate.

However, if schemes have a strong employer covenant, a significant number of respondents (42 per cent) believe schemes should be able to invest in a slightly “riskier” strategy at various points in time.

The ACA also reiterated calls for a carve-out for open schemes, pointing out that a recent ACA survey found that two thirds of those who indicated the issue was applicable, thought the proposed new regime would have a negative impact on schemes open to future accrual.

“We have a strong preference for use of a less volatile measure of significant maturity, to help schemes plan ahead with certainty on when they must reach low dependency and would support a fixed basis for the calculation of duration," Taylor added.

"In addition, as set out in our response to the draft regulations, we would prefer schemes to be able to set a relevant date within a wider range of the projected date of significant maturity.”

Streamlining the process

Adding to this, Society of Pension Professionals (SPP) president, Steve Hitchiner, said that while the SPP was supportive of the fundamental objectives of the new funding regime, some aspects require revision to make the proposals workable for all schemes.

He stated: "Covenant assessment should be proportionate to a scheme's situation, and we suggest that this is made clearer in the code and further guidance. Many of the requirements could also be eased for certain schemes, such as those that are immature or fast-track compliant.

“Overall, we believe that TPR should aim for a code that is simpler, shorter and focussed on the key areas that inform scheme strategy.”

Isio director, Iain McLellan, also suggested that TPR could look to streamline the code by moving the detailed guidance on every funding assumption from the code into its fast-track parameters, explaining that this could then be replaced with a "simple overarching requirement, that the funding assumptions being adopted are appropriate".

"The subjective nature of covenant reliability also has potential to cause unnecessary issues for trustees and covenant advisors in trying to come up with an accurate value to use," he continued.

"By introducing a default covenant reliability period for trustees, the process of setting this value is simplified whilst still allowing flexibility to adopt a different value where the default isn’t appropriate."

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