Long-awaited second consultation on the DB funding code and regulatory approach is welcomed

16 December 2022
Today, The Pensions Regulator (TPR) published its second consultation on the defined benefit (DB) funding code, following the first consultation back in March 2020. The consultation package is supported by a draft DB funding code and a consultation on TPR’s new twin-track regulatory approach to assessing actuarial valuations – ‘Fast Track’ and ‘Bespoke’.

Commenting on the various releases, Guy Mander, partner and head of covenant assessment services at RSM UK said: ‘We welcome the publication of these documents which provide the framework for schemes setting out and implementing their own long-term objective and journey plan for achieving that objective. They also provide for flexibility around funding to suit scheme-specific circumstances. We see most of what is being proposed as evolutionary, as in many cases this approach (or similar) is already being undertaken by trustees and advisers.

‘TPR has issued these documents based on the draft regulations recently consulted on by the Department for Work and Pensions (DWP); as these regulations are not as yet finalised, there should be some scope for incorporating and consolidating the views expressed by respondents to the DWP consultation, particularly those relating to the employer covenant. We also note that TPR proposes to consult on an updated covenant guidance in the coming months; we hope that this will be published during this consultation window so as to maximise the opportunity to comment on a consolidated position.

‘The draft regulations embed covenant into the legislative framework for the first time, with covenant underpinning the level of risk supportable over a scheme’s journey plan. The draft funding code sets out TPR’s expectations for assessing covenant over that journey plan, with a focus on a sponsor’s cash flows and prospects (looking at the visibility of forecasts, reliability of available cash and longevity of the covenant), as well as providing guidance as to how trustees should consider valuing contingent asset support.’

He added: ‘The draft regulations also introduce into the legislative framework a principle that funding deficits should be recovered as soon as the employer can reasonably afford. We welcome TPR’s expectations as to how trustees should approach this principle – by determining what is ‘reasonably affordable’ and providing sponsors with the ability to invest and use available resources for appropriate means. There had been some concern that strict adoption of the wording in the draft regulations might stifle sponsors from investing for growth.

‘We also welcome TPR having taken account of the numerous responses made to the initial March 2020 consultation in relation to the proposed new regulatory approach. In particular, the shift away from using ‘Fast Track’ as a benchmark is to be welcomed, enabling schemes to adopt either of the twin-track approaches, and treating both approaches as being equally valid, providing that legislation and funding code principles are followed. We look forward to reviewing the documentation in detail over the coming weeks and engaging positively as part of this consultation process.’