The Society of Pension Professionals (SPP) has published updated guidance for the new defined benefit (DB) funding regime, following "uncertainty and speculation" around how schemes should adjust their strategies under the new regime.

The Pension Schemes Act 2021 introduced a requirement for DB pension schemes to have a funding and investment strategy to ensure pension and other benefits under the scheme can be paid over the long term.

However, the Funding and Investment Strategy Regulations issued earlier this year will also apply to valuation dates on or after 22 September 2024, with The Pensions Regulator's (TPR) new DB Funding Code also laid in parliament last month (July).

Given this, the SPP suggested that it is worth trustees considering how their existing strategies may need to be changed as a result of the new regime.

In particular, it explained that regulatory changes may require them to adjust the amount of risk that they are carrying, change the date at which they aim to get to their long-term funding target because their covenant does not support it, or change the eventual long-term funding target if the covenant does not appear to support it.

The SPP explained that the new regulations gave the first definition in law of covenant, suggesting that this is likely to require "fundamental change" to the output and interpretation of covenant assessment processes for many schemes, moving away from covenant grades and instead focusing on quantifying future cash and documenting business risks.

The SPP said that the information to be considered will vary depending on the individual journey plan and covenant commitments but in most circumstances is unlikely to be limited to publicly available information.

Given this, it argued that the right kind of information flows between companies and trustees are essential, therefore encouraging trustees to engage with employers as early as possible to advise that change is coming and to start relevant conversations.

In parallel with their analysis of the factors referred to in the regulations, the SPP said that trustees should continue to take into account other matters relevant to the outcome of their valuation discussions, such as the analysis of the balance of powers under the scheme documents and the potential for covenant enhancement from new contingent assets.

Commenting on the guidance, SPP president, Sophia Singleton, said: “The SPP welcomes the fact that the DB Funding Code has now been laid before parliament.

“However, there remains a degree of uncertainty and speculation around how schemes should adjust their strategies under the new regime.

“As a result, the SPP has produced this concise and insightful guide, which we believe will prove helpful in assisting a wide range of pension professionals, including trustees, actuaries, pension consultants and lawyers, in better understanding what’s now required.”

The guidance also reassured trustees that delays to the implementation of the code, whilst something to be mindful of, are less of a concern given that current legislation permits up to 15 months for the valuation process, meaning a valuation dated 30 September 2024 would not need to be completed until the end of 2025.

It also pointed out that TPR has confirmed that there will be a gap between when the requirements of the Funding and Investment Strategy Regulations start applying and the new DB funding code is in force, stating that they will take a "reasonable" regulatory approach.

However, the SPP suggested that those with valuations with effective dates before 22 September 2024 may also find it prudent to consider how their current valuation may or may not align with the new legislative framework, although there is no requirement to do so.

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