The Pensions Regulator (TPR) has launched a consultation to seek views on changes to the defined benefit (DB) funding code to better manage risks on long-term scheme funding and investment strategy planning.

TPR hopes that the consultation will allow it to create a clearer framework for DB funding and give clarity on how its ‘twin-track’ approach on scheme valuations will work.

The revised code of practice is expected to come into force at the end of 2021 after this first consultation, which closes in 12 weeks, and a second consultation at the end of 2020.

Under the new proposals, trustees will be able to choose either a ‘fast track’ or ‘bespoke’ approach for completing and submitting a valuation of their scheme.

Trustees that are able to demonstrate that their scheme valuation meets TPR criteria for a compliant scheme will be able to follow the fast track route, which is more straightforward but prescriptive.

Those who cannot prove that they meet those criteria or prefer a bespoke approach can select the alternative, which offers more flexibility but requires more supporting evidence on their approach.

Bespoke approach schemes will be subject to increased scrutiny and TPR will be asking how they will manage additional risk and what affordability constraints they are subject to, the regulator said.

However, TPR noted that some bespoke solutions will require little scrutiny and engagement if the answers given are satisfactory.

“The launch of our consultation on a clearer framework for DB funding is a significant moment for DB schemes,” commented TPR executive director of regulatory policy, David Fairs.
 
“We want to make sure pensions have the necessary long-term approach to ensure savers get the benefits they expect.

“Today we are setting out our expectations about how trustees should manage risks in an integrated way when planning their scheme’s long-term funding and investment strategies.”

The consultation will also investigate what parameter levels should be in place for categorising which approach schemes should take.

Fairs added that, although it would be “attractive to the industry if the parameters are relatively stable”, the regulator would have to “be able to adapt” the parameters to market conditions.

If these changes were significant, it may consult further on those in the future, as well as on the best measure of maturity.

The consultation will also ask about how trustees should measure investment risk in fast track, with the Pension Protection Fund’s stress test a possible measure.

It represents a “huge shake-up” of DB funding, according to LCP senior partner, Bob Scott, who added that the proposals could “lead to a wave of closures”.

Fairs concluded: “With most DB schemes closed to new members and/or future accruals, we can expect them to be significantly mature in 15 to 20 years’ time, with the majority of their members retired.

“These schemes will be more vulnerable to risks associated with poor funding levels and shorter investment horizons. Therefore, trustees should aim to reduce their scheme’s reliance on the sponsoring employer as they mature.

“We want to be confident our expectations are effective and appropriate for trustees and in turn the savers in these schemes.”

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