Industry experts have welcomed the final defined benefit (DB) funding regulations, although concerns over the level of flexibility in the long term have persisted, with some warning that the regulations could be at odds with the government's productive finance push.

The Department for Work and Pensions (DWP) published the final DB funding regulations yesterday (29 January), revealing that it had made a number of revisions in response to industry feedback.

Commenting on the final regs, LCP partner, Jon Forsyth, said that "it’s great to see the starting gun for the new DB funding regime finally fired, and what is more it is pleasing to see that DWP has listened to the industry in a number of areas in making updates that we support".

In particular, Broadstone head of market engagement, Simon Kew, said that the increased focus on scheme-specific flexibility is to be welcomed given the risk of inflicting unnecessary cost and burden onto smaller schemes.

“Trustees and employers now have the clarity to set in place long-term plans for schemes that will benefit members while delivering a regime that will encourage productive finance and its potential benefits for the UK economy,” he continued.

Pensions and Lifetime Savings Association (PLSA) director of policy and advocacy, Nigel Peaple, also welcomed the revised regulations, noting that "importantly", the updated regulations clarify that DB schemes can take appropriate levels of investment risk where supportable by the employer covenant.

He continued: "Notably, the final set of regulations specifically provide greater flexibility by empowering mature schemes to diversify investments in a wide range of assets without constraints. The clarified stance on sustainable growth aligns with affordability considerations for sponsoring employers.

"A reduction in burdens from streamlined processes for information requests, reducing administrative burdens based on individual scheme circumstances will also aid scheme trustees.

"These changes signify positive strides toward a more adaptable and efficient regulatory framework."

This was echoed by Association of Consulting Actuaries (ACA) chair, Steven Taylor, who agreed that “there certainly seems to have been considerable efforts made to address the additional flexibility we sought and, subject to a more lengthy consideration, it seems the Regs and the most recent code complement each other much better than they did”.

“However," Taylor said, "it’s a shame the regs and ‘final’ code were not published together – we just hope the delay in issuing the code is short and that its final version does not re-open new contradictions."

Indeed, Hymans Robertson head of DB actuarial consulting, Laura McLaren, said that whilst the revised regulations have addressed some of the biggest concerns, “we won’t know what it will all mean until TPR publishes its new funding code”.

“For example, there isn’t anything in this draft legislation confirming the specific Fast Track parameters or pinning down significant maturity,” she continued.

“So today’s update is but one piece of the puzzle schemes will need to consider on regulatory compliance as their end-game plans develop. Nevertheless, 2024 is starting to look like it might be the year when the DB funding regime is finally fully realised.”

And despite the revisions, there are still some areas of concern, as LCP partner, David Fairs, warned that not providing further flexibility for pension schemes in the long term could be a challenge for some scheme sponsors, and arguably is at odds with the government’s Mansion House agenda.

“Given that the code is expected to ensure members receive their full benefit with a high level of probability, there is a real likelihood that some schemes will end up with trapped surplus,” he continued.

“Ways of accessing surplus should now become a priority for government if it wants pension schemes to support its productive finance agenda."

WTW head of pension scheme funding, Graham McLean, shared these concerns, stating that while some of the tweaks may help the regulations to better support the productive finance agenda, “the suggestion that schemes will have freedom over investment is more implicit than it needed to be, and it is hard to see anything in the final regulations which fulfils the promise to ‘make it explicit that there is headroom for more productive investment”.

He explained: “In particular, the regulations still indicate that, once a scheme is significantly mature, its funding basis must assume an investment allocation which makes the value of assets relative to liabilities not only resilient to market movements but ‘highly resilient’ to them.

“It is arguably now clearer that this need not apply to surplus assets, and the government is underlining that actual investments could be different from those assumed.

"But trustees might still question whether the ‘highly resilient’ test allows them to assume for funding purposes that 20-30 per cent of their portfolio is in growth assets, as the regulator has said might be possible.”

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