The Pension Regulator’s (TPR) defined benefit (DB) funding code fast track structure could be at risk of being used too broadly and is in danger of suffering from “mission creep”, Aon has warned.

The company highlighted that the fast track structure's use has been proposed in many different ways, arguing that it will not be able to achieve all the objectives outlined.

These include the use of the fast track as a simplified compliance option, as a measurement for comparison with a scheme’s bespoke solution, and as a default that TPR may impose if not satisfied with the funding outcome agreed by trustees and the scheme sponsor.

Aon partner and head of UK retirement policy, Matthew Arends, argued that this was “not the original policy objective” of the fast track route.

He stated that judging bespoke solutions against fast track compliance does not seem “consistent” with the concept of the scheme-specific funding regime.

Furthermore, he warned that fast track could see a “levelling down” for schemes that had made good progress on strong long-term objectives.

Arends explained: “In Aon's ‘In Depth’ analysis, 55 per cent of schemes with tranche 14
valuations (from September 2018 to September 2019) had set long term funding targets stronger than the proposed fast track gilts+0.25 per cent to gilts+0.5 per cent pa.

“It’s also possible that fast track’s investment simplicity may have the unintended consequence of encouraging investment changes by schemes to favour some asset classes – particularly low risk/low return liquid investments.

“This is because those asset classes may make it easier for schemes to pass the fast track test even though such asset class changes may not be in the broader interests of the scheme.”

Industry experts have previously warned that the funding regime could risk pushing schemes towards more conservative investment approaches, with the Association of Consulting Actuaries (ACA) calling on TPR to maintain flexibility without tying all schemes to fast track by default.

Aon has also highlighted a number of “mixed messages” coming through from the consultation, such as issues around covenant strength.

Aon partner Lynda Whitney explained that whilst covenant strength is stated as important within the consultation, its importance under fast track is minimal if schemes are mature, or is reduced due to a focus on the length of future covenant visibility.

She continued: “Given that failure of covenant is ultimately the only risk that will result in members entering the Pension Protection Fund and receiving less than full benefits, any reduction in the importance of covenant is a concern – and especially when we are approaching a time of extreme economic uncertainty.”

Whitney also highlighted further ambiguity as to what is meant for technical provisions to “be consistent” with the long-term objective (LTO), and whether the gap to the LTO is then funded by contributions or investment performance.

Considering this, she warned that there is a risk of increased costs to UK plc if TPR expects all schemes’ technical provisions to converge with the LTO by a fixed timeline.

She added: "Similarly, although alternative financing is supported by TPR, they have not
resolved some of the practical issues of how it can be taken account of in the funding regime, as it often can’t count directly towards the recovery plan.”

However, the regulator emphasised earlier today (26 August) that the twin-track approach included in the funding code should provide greater clarity for trustees and employers.

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