Some mature pension schemes could see their deficits double under new defined benefit (DB) funding rules if a transition period is not included in the fast track option proposed by The Pensions Regulator (TPR), XPS Pensions Group has warned.

In its consultation on the new DB funding regime, which closes today (2 September), TPR’s proposed framework would require schemes to be fully funded against a long-term objective by the time they are significantly mature.

Responding to TPR’s consultation, XPS Pensions senior consultant, Stephanie Cole, said that “there are a number of schemes already at this point” and they could see their deficits double “at the top end of targets in the consultation”.

“Despite being prudently funded now, these schemes could see deficits increase by 50 per cent under the new proposals, or even double at the top end of targets in the consultation,” she stated.

“At the same time, such schemes may need to undertake substantive de-risking exercises to ensure compliance, potentially forcing them into selling assets at a time of market uncertainty.”

Cole urged TPR to consider including a transition period in the fast track approach to allow schemes to benefit from its advantages, such as lower fees and increased regulatory efficiency, from day one.

“We think some schemes in this position, especially smaller schemes, should still have the option to take advantage of the benefits offered by the fast track approach,” she added.

“The best way to resolve this would be to introduce a minimum transition period of six years before schemes’ funding targets must be set at the new long-term objective.”

XPS also urged the regulator to consider an alternative approach to how it will assess schemes under the bespoke route outlined in the consultation.

The firm warned that current proposals link the assessment of bespoke approaches too closely to fast track, which could deny “true flexibility”.

Government proposals stipulate that trustees will have to prepare a statement of strategy, referred to as the new DB chair’s statement, which is directly relevant to their scheme, employer, and funding approach.

XPS has recommended that TPR initially reviews bespoke valuations using only the work already done by trustees and employers to develop their new DB chair’s statement, and not relative to the fast track benchmark.

“We do not think trustees who follow a bespoke route should have to carry out a separate piece of work to reconcile all parts of their approach to the fast track standard,” said Cole.

“We believe this would add unnecessary cost and is not appropriate given the wide range of potential bespoke approaches that could be appropriate.”

Despite these recommended changes, XPS said it was supportive of the principles proposed to regulate the expected changes to government rules on long-term funding strategies and that some schemes may find the consultation proposals helpful for current valuations, even before the new rules are introduced.

Additionally, the firm expected the fast track route to lead to minimal regulatory scrutiny for trustees submitting valuations and was “encouraged” that a bespoke option would be possible, retaining the flexibilities of the current system.

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