The Pensions Regulator's (TPR's) defined benefit (DB) funding code is expected to be in place and operational in "late 2022 or early 2023", with the second consultation on track to take place in H2 of 2021.

Speaking at the Pensions and Lifetime Savings Association (PLSA) Investment Conference 2021, TPR executive director of regulatory policy, analysis and advice, David Fairs, confirmed plans for further industry engagement, with the launch of the second consultation expected “towards the end of the year”.

TPR previously confirmed that the second consultation on the funding code would be expected in the second half of this year, having been delayed from mid-2021.

Fairs explained that this delay occurred, in part, a result of the regulator taking time to consider and analyse the shift in the economic environment, noting that TPR is also awaiting the publication of regulations from the Department for Work and Pensions (DWP).

He stated: “We are taking the time to think about the current economic environment, to think about the impact of Brexit, that is partly the reason why we’ve deferred into the second part of this year issuing our second consultation.

“We’re obviously delighted the Pension Schemes Act 2021 now has Royal Assent, but it’s important to know that some parts of the act, including in relation to DB, won’t commence immediately. DWP needs to issue and consult on regulations, and then we can publish and consult on our draft code."

He continued: “In the meantime, at the regulator, there’s a lot of work for us to do. We are still analysing the responses to our first consultations and the questions that have arisen from that."

"We’ll also be conducting an impact assessment, and that’s important to get the balance right. It’s important that we take account of the different market conditions since we issued our first consultation, both in the light of Covid-19 and Brexit," he added.

"And we will carry out further engagement and launch the second consultation on the draft code towards the end of the year, with a view to the code being finalised and operational in late 2022 or early 2023.”

Despite this, he emphasised that schemes do not have to wait until the new code is in place to take action, stating that the regulator views setting a long-term objective and journey plan to get there, including managing the risks along the way, as “good practice”.

In addition to this, Fairs addressed some of the concerns highlighted by respondents to the first consultation, particularly those around the flexibility of the new code.

He acknowledged that there were concerns that fast track was too inflexible and may not reflect current changes in the market, stating that this is “something [TPR is] thinking about really carefully and doing much more analysis on, particularly in light of the current economic conditions”.

However, he also clarified that whilst there were concerns around the loss of flexibility in using fast track as a reference point, this is "just a reference point", stressing that scheme flexibility will remain as long as trustees can demonstrate that risks can be managed.

Furthermore, in response to concerns around the potential increase in compliance costs and scrutiny, Fairs stated that schemes that are doing integrated risk management really well, should only see a “very small” additional burden.

“But if schemes are not doing integrated risk management,” he clarified, “than clearly we think it’s a good idea that they start to do that.”

In addition to this, Fairs argued that some of the concerns are open schemes, and worries that they may be under threat, are a "misunderstanding” of the regulator’s proposals.

“We are not saying at all that open schemes have to de-risk, or that they’ll be limited from investing in growth assets or illiquid assets,” he stressed.

“We’re saying that risk has to be supported and based on scheme maturity and strength of covenant. If an open scheme never matures, then it will never progress towards the low dependency long term objective.

“With a strong covenant and continued immaturity, schemes can continue to invest significantly in growth assets."

Fairs added: “We remain committed to the scheme specific funding regime, we don’t want to see good and viable open schemes close unnecessarily.

“We are considering responses carefully, and in particular, we should incorporate more specific flex in the fast track for open to new member schemes, as long as it doesn’t undermine key principles, such as that of equal security.”

As part of the written Q&A, Fairs also addressed concerns around section 107 of the Pension Schemes Act in the Q&A, emphasising that this requires a “high bar” for the regulator.

“It is worth remembering that a criminal sanction has a high bar for us to use," he stated.

"The action that causes us to use the powers granted by section 107, therefore need to be of such significance to justify that. There is a high bar for all criminal sanctions because of the seriousness of the outcome.”

He also confirmed that further guidance around these powers, and a consultation on this guidance, will be published "shortly", and should “hopefully” provide more clarity around these concerns.

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