Pension professionals have been encouraged to ensure they understand the risks and opportunities the new defined benefit (DB) funding regime has created, rather than just being aware of the requirements themselves.

With the new DB Funding Code officially coming into effect earlier this month, the Society of Pension Professionals published a new report identifying a number of opportunities and risks with the new code, as well as 'busting' various myths about the new funding regime.

In particular, the SPP argued that avoiding the misconception that covenant doesn’t
matter beyond low dependency is "essential".

In addition to this, it cautioned against the idea that schemes with good funding levels and/or
low funding and investment risk don’t need to look at covenant at all.

Whilst the SPP acknowledged that the specific wording in the code could potentially set a low bar for covenant assessment in such circumstances, it argued that the code is "clear" that trustees will need to carry out a fuller assessment of the covenant and a more detailed analysis of the level of risk to allow for in the journey plan.

Similarly, it pointed out that the Statement of Strategy requires trustees to confirm that “the strength of the employer covenant [is] adequate by reference to the actuarial valuation to which the funding and investments strategy relates”, which would be difficult to confirm without having done a proportionate level of analysis.

Despite concerns that the funding code could lead to increased tension between the trustee and sponsor over the long-term objective, the SPP argued that the door is open to engage with employers on a longer-term plan.

"The requirement to agree the Funding and Investment strategy with the employer should be seen as a helpful and important opportunity to engage with an employer on its longer-term plans for the scheme in the context of its own longer-term business strategy," it stated.

"As a topic that an employer can sometimes seek to avoid discussing in detail for a variety of reasons e.g. focus on triennial valuation or lack of bandwidth to consider in the required level of detail within the business. This could be something to take advantage of."

However, the paper also warned that simply meeting DB Funding Code requirements is not ‘job done’ when it comes to covenant, arguing that, at every stage, trustees should be considering not only “what do we need to submit to the Regulator to satisfy their need for information” but also “what analysis will contribute to decisions that lead to the best outcome for members.”

"In some cases this might be one and the same, but in many cases there will be analysis that goes above and beyond the minimum regulatory requirements that will lead to improved member security," the SPP said.

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