The defined benefit funding code is changing - what do TPR's proposals mean for trustees and employers?

24 March 2020

This month, The Pensions Regulator (TPR) issued the first of two consultations on a revised code of practice on defined benefit scheme funding (the Revised DB Funding Code). The first consultation sets out TPR's proposed regulatory approach, the principles that underpin the new framework and how TPR thinks they could be applied in practice (the First Consultation). The second consultation, due later this year, will focus on the text of the Revised DB Funding Code itself along with the accompanying guidance (the Second Consultation).

The Revised DB Funding Code is part of a package of measures prompted by from high profile corporate insolvencies in 2016 and 2017 and identified in a white paper issued by the Department for Work and Pensions (DWP) in 2018 ('Protecting Defined Benefit Pension Schemes') (the White Paper). When added to legislative provisions set out in the Pension Schemes Bill 2019 - 2021 (the Bill) and TPR's increasingly proactive regulatory approach, the Revised DB Funding Code will mark a step change in how trustees and employers approach scheme funding.



Key points

1. TPR will issue two consultations on the Revised DB Funding Code

­TPR has issued the first of two consultations on the Revised DB Funding Code. The First Consultation sets out TPR's proposed regulatory approach, the principles that underpin the new framework and how TPR thinks they could be applied in practice. The Second Consultation will focus on the text of the Revised DB Funding Code and the accompanying guidance. It is important to note, however, that TPR has announced that it will be "suspending all regulatory initiatives" amid the coronavirus crisis. This may result in a longer consultation period and a delay to the overall implementation of the Revised DB Funding Code.

2. TPR aims to tackle a maturing DB landscape and increase transparency on risk

TPR is intending to address: (a) a maturing DB landscape by encouraging schemes to rely less on employers as they mature; (b) inappropriate use of funding regime flexibilities by formalising standards; and (c) increase accountability and transparency on risk-taking.

3. The Revised DB funding code aims to provide an objective funding standard and to establish core principles and guidance

There are two main aims of the Revised DB Funding Code:

  • to provide an objective funding standard to create clarity, consistency of risk management and a point of reference to better enable trustees to assess how their subjective 'scheme-specific' funding approach is compliant; and
  • to establish core principles to underpin the code, to guide trustees, employers and advisers in taking a bespoke approach and for TPR to apply in enforcement actions.

4. TPR will replace its 'one-size fits all' funding standard with a twin-track compliance route

TPR intends to introduce a twin-track compliance route, featuring:

  • a Fast Track approach for schemes that can meet straightforward quantitative compliance guidelines; and
  • a Bespoke approach for trustees and employers who require more flexibility to account for scheme and employer-specific circumstances.

5. Trustees will need to set and document a long-term objective

TPR is consulting on an appropriate funding and investment strategy, to be called the long-term objective (LTO). The consultation seeks views on an appropriate LTO for the Fast Track approach, but the expectation is that it will also form the basis of any Bespoke approach too. The consultation sets out TPR's views on potential definitions of a low dependency funding basis and significant maturity. TPR considers the low dependency discount rate to be somewhere in the range of Gilts +0.5% per annum to Gilts +0.25% per annum, and significant maturity to be 15 to 20 years from now for a scheme of average maturity.

6. TPR will adopt one approach to determine suitable technical provisions for schemes using the Fast Track approach

A scheme's journey plan to achieving its LTO could take various forms but TPR will need to adopt one approach to determine the relevant technical provisions applicable for schemes using the Fast Track approach. The consultation considers what factors should be included in Fast Track technical provisions as well as how technical provisions should be expressed and how to determine if they are acceptable in the Fast Track framework.

7. TPR will not prescribe how trustees should invest but will set out clear expectations on risk

TPR states that it is not seeking to direct how trustees should invest scheme assets. However, TPR does intend to set out clear expectations regarding what it considers to be an appropriate level of investment risk for trustees following the Fast Track approach.

8. TPR will be clearer about what appropriate recovery plans look like and will set a maximum length for schemes using the Fast Track approach

TPR is consulting on the appropriate balance between sustainability and risk for the Fast Track approach and, in particular, whether the recovery plan criteria should be entirely prescriptive or whether some flexibility should be allowed.

9. Will your scheme specific circumstances be 'Bespoke option' compliant?

If the Bespoke option is likely to be relevant, additional work will be involved, even for well-run schemes, to compare their funding strategy against the Fast Track equivalent framework and to assess and then explain and demonstrate "robustly" why the scheme is different and how any additional risk is being appropriately managed through additional support and/or mitigation actions.

10. Will your scheme be able to 're-use' PPF guarantees to support a Bespoke arrangement?

In general terms, contingent security arrangements required for Bespoke scheme funding purposes are likely to be greater in value and broader in scope than the support used for PPF levy reduction purposes. Trustees should not simply assume that a PPF-compliant asset would be appropriate for Bespoke funding purposes.

What is the background to the Revised DB Funding Code?

In July 2016, the high street retailer BHS went into administration. Along with the loss of thousands of jobs, the BHS pension scheme was left with a deficit of £571 million. In January 2018, the outsource provider Carillion collapsed leaving a similar sized deficit in its defined benefit pension scheme.

Prompted by media and parliamentary scrutiny, the government promised action. This resulted in a green paper ('Security and sustainability in Defined Benefit Pension Schemes') issued in February 2017. This was followed by the White Paper in March 2018. The Bill was introduced in November 2019 and then reintroduced following the general election in January 2020.

What is the context for the first consultation?

Clearer, quicker and tougher

In the First Consultation, TPR reiterates its aim to be "clearer, quicker and tougher". The White Paper concluded that the UK's defined benefit funding framework was "working largely as intended" but improvements could be made. Improvements will enable TPR to regulate more efficiently and use its enforcement powers (where required).

What is TPR consulting on in the First Consultation?

The First Consultation focuses on TPR's proposals for a revised funding code and the legislative changes introduced by the Bill. In particular, it sets out TPR's initial proposals for "a clearer, more readily enforceable funding framework", which implements the requirements set out in the Bill. The First Consultation seeks views on:

  • TPR's proposed 'twin-track compliance routes' and its approach to prudence and risk taking;
  • the principles that should underpin the code; and
  • options on how these principles can be applied in practice.

Timetable for TPR's consultations

The First Consultation is open for responses until 2 June 2020. The Second Consultation will be issued later this year and will focus on the actual text of the Revised DB Funding Code. The guidelines that it contains will be influenced by the responses to the First Consultation.

TPR expects the Revised DB Funding Code to come into force in late 2021 but notes that the revised code is "intrinsically linked" to the legislative timetable and will come into force at the same time as the Bill and once it has been approved by the Secretary of State.

It is important to note, however, that TPR has announced that it will be "suspending all regulatory initiatives" amid the coronavirus crisis. This may result in a longer consultation period and a delay to the overall implementation of the Revised DB Funding Code.

What are the main issues that the Revised DB Code is seeking to address?

TPR intend to address the following issues:

  • A maturing DB landscape - TPR believes that schemes should progressively reduce their reliance on sponsoring employers as they mature;
  • Inappropriate use of flexibilities - most schemes are well run but TPR is looking to formalise standards more clearly to "embed … good practice"; and
  • Lack of accountability and transparency around risk taking - TPR does not intend to eliminate all risks but ensure that they are "appropriately identified, understood and managed".

What is the theory that underpins TPR's approach to the Revised DB Funding Code?

Eight key principles to stand behind all scheme valuations

TPR proposes eight core principles to underpin the new funding code, the Fast Track framework and which will be applied to enforcement action. These are:

  1. Compliance and evidence - trustees and employers need to be able to understand their scheme-specific funding and investment risks and objectively evidence how these risks have been assessed and, if applicable, managed. When demonstrating how risks are managed, trustees will need to be able to compare the risks they have taken to a standard tolerated risk position and explain the risk mitigating steps they have taken.
  2. Long-term objective (LTO) - TPR expects that significantly mature schemes should have a low dependency on the employer and be invested with a high resilience to risk.
  3. Journey plans and technical provisions - trustees will need to develop an LTO and a 'journey plan' to reach that objective, with risk decreasing as they move towards the LTO. TPR expects trustees to link technical provisions to the LTO and move those towards the LTO as the scheme progresses along its journey plan.
  4. Scheme investments - a scheme's investment strategies and asset allocations over time should be aligned broadly with the scheme's funding strategy. Trustees of mature schemes should prioritise the security of accrued benefits and have a high resilience to risk through investments.
  5. Reliance on the employer covenant - schemes with stronger employer covenants can take more risk and assume higher returns. Trustees should, however, seek to reduce dependency on the employer as the scheme matures.
  6. Reliance on additional support - trustees will be required to document risk assessments, evidence how risks are to be mitigated, managed or tolerated and be able to demonstrate what measures they have in place to deal with tolerated risks.
  7. Appropriate recovery plans - deficits on a technical provision basis should be recovered when affordable. However, the speed of deficit recoveries should not be to the detriment of sustainable employer growth.
  8. Open schemes - there should be the same level of security for accrued benefits in open schemes as for closed schemes, and the security of those accrued benefit should be prioritised over providing future benefits for members.

It is also expected that these principles should guide trustees, employers and their advisers when using the Bespoke approach.

A 'twin track' approach

TPR proposes a 'twin track' approach, with two compliance routes to carrying out valuations. These are referred to by TPR as Fast Track and Bespoke. TPR emphasises that either approach is acceptable and that it has no current expectation as to the number of schemes which may be likely to adopt the Fast Track approach.

However, TPR makes clear that choosing to take a Bespoke approach will not be an opportunity for schemes to opt-out of the new regime. Where a scheme chooses to adopt a Bespoke approach, trustees will still need to be able to articulate and evidence their position and follow the core principles.

TPR's approach to employer covenant

The First Consultation recognises that the strength of the employer covenant is an important scheme-specific security measure. TPR is, however, keen for trustees to manage and mitigate the risks of over-reliance on the employer covenant and to introduce a more consistent and objective way to factor in employer covenant to their funding assessments.

TPR proposes three options to integrate employer covenant into the funding regime. In addition, TPR proposes to retain their current four-tier grading of employer covenant and consider gradings may be a useful benchmark for trustees to assess the appropriate level of risk to take.

The fast track approach in more detail

Setting the long-term objective (LTO) under the Fast Track approach

Chapter 8 of the First Consultation sets out TPR's proposals for the following elements of a Fast Track LTO.

Discount rates

TPR considers that an appropriate funding basis for Fast Track low dependency could adopt a discount rate in the range of Gilts +0.5% per annum to Gilts +0.25% per annum. TPR is seeking views on whether this proposal is appropriate.

Other assumptions (relating to members' benefits)

TPR recognises that there are many other assumptions required to calculate liabilities including: inflation, pension increases, mortality, cash commutation and CETVs. TPR has considered and is seeking views on the following options in relation to whether it should define each of those assumptions:

  • there would be no requirements other than the principle that these assumptions, when taken together, should be no weaker than "best estimate";
  • TPR to define some of these assumptions where it could be argued that they are not scheme specific (examples given are inflation or future improvements in longevity); or
  • TPR to define all of these assumptions (this seems to be the least preferred option by TPR).

Reserve for future ongoing expenses

To achieve low dependency, TPR considers a reserve for future ongoing expenses would ideally be included in the low dependency liabilities used for Fast Track. This may not be necessary if the scheme's trust deed and rules provides for the employer to reimburse a scheme's expenses on an ongoing basis. For schemes that do not have this provision, TPR would expect that an explicit reserve should include all future expected ongoing expenses, including PPF levies.

Assumed investment strategy

TPR does not propose to specify asset allocation when a scheme reaches significant maturity. However, it would expect a scheme to adopt a strategy consistent with a low dependency funding basis. Examples given include: majority of assets invested in gilts and liability-driven investments; wholly invested in bonds (high quality and liquid); gilts and high quality corporate bonds.

Scheme maturity

TPR is considering four measures by which to determine maturity:

  • duration of the liabilities;
  • proportion of remaining cash flows relating to pensioner members;
  • proportion of scheme assets (or liabilities) paid as benefits; or
  • proportion of liabilities that relate to pensioner members.

On balance, TPR considers duration of the liabilities to be the most suitable measure to define the point of significant maturity. This is widely used by actuaries as part of their valuation calculations.

technical provisions under the Fast Track approach

The principles underpinning TPR's thinking around technical provisions in the context of the Fast Track approach are that:

  • trustees are expected to develop a journey plan to achieve their LTO;
  • investment risk should decrease as a scheme matures and reaches low dependency;
  • technical provisions should have a clear and explicit link to the LTO;
  • technical provisions should converge to the LTO over time as evidenced by the journey plan. Technical provisions are to act as key milestones on the journey; and
  • a stronger employer covenant allows more risk BUT trustees should assume less reliance on covenant over time depending on the period of its visibility.

Technical provisions and the journey plan

A scheme's journey plan determined will be determined by its underlying shape, covenant support available and covenant visibility. A journey plan could take various shapes but TPR will need to adopt one approach to determine the technical provisions used in the Fast Track approach. There are three options set out in the consultation but TPR recognises there are other options for de-risking and asks for information about the other approaches schemes currently adopt and what alternatives TPR should consider.

Employer Covenant

TPR also needs to consider what factors should effect the shape of the discount rates / technical provisions in the Fast Track framework. Employer covenant strength is recognised as a key one.

The suggestion in the consultation is to allow some reliance on covenant to underpin additional levels of investment risk assumed in setting discount rates and technical provisions but subject to defined limits. There would be base line technical provisions which are independent of covenant, then higher assumed investment risk would be allowed at different levels depending on covenant strength, up to a maximum assumed investment return allowance. TPR would still expect low dependence on the covenant at the point of significant maturity of the scheme and is considering the extent to which covenant visibility should be addressed in technical provisions.

Setting technical provisions in the Fast Track framework

TPR wants to ensure that most schemes can take the Fast Track compliance route without making material changes to their approach to journey planning and setting technical provisions.

The consultation considers how TPR should express technical provisions used in the Fast Track approach. Options are:

  • discount rates (maximum acceptable under Fast Track) - either single equivalent discount rates (concerns with this approach are that it could look like a minimum funding requirement) or term/maturity dependent discount rates (this approach is more restrictive than other approaches). Both of these approaches would require additional guidelines for other key assumptions; and
  • target technical provisions (minimum acceptable under Fast Track) as a percentage the TPR-defined Fast Track minimum funding low dependency basis. This could be easier to understand and explain and put less restrictive constraints in the design of technical provisions and the investment strategy. It could move focus away from discount rates.

How would TPR determine acceptable technical provisions?

TPR puts forward three possible methods - a data driven approach, a technical provision target using stochastic modelling and a technical provision target using deterministic modelling.

The data driven approach would use TPR's data and so be based on the actual behaviour of schemes. The data would be used to define acceptable practice for the level of technical provisions or discount rates under the Fast Track approach. Concerns with this approach are that the data may not be entirely reliable and that the approach becomes circular with schemes' current behaviour used to determine their future behaviour.

A technical provision target using stochastic modelling requires an explicit link between the technical provisions and the LTO. The target level of technical provisions would be determined using a stochastic modelling approach which would be set up to determine what level of assets the scheme needs to hold now so that there is an acceptable degree of confidence it will reach low dependency funding at its point of significant maturity.

This approach would require various assumptions to be set and TPR would consult on those assumptions. TPR recognises that this approach would be complex and potentially resource intensive but it would allow for more robust testing and could allow less prescription around the shape of the journey plan.

The last suggested approach, a technical provision target using deterministic modelling, is similar to the above but uses deterministic assumptions rather than stochastic modelling to generate a range of economic and investment scenarios. This would be simpler to apply than the stochastic approach, allowing scenarios to be modelled and promoting engagement by trustees.

Scheme investments under the Fast Track approach

How does TPR think that schemes using the Fast Track approach should measure risk?

TPR considers how investment risk should be measured, preferring the use of a 'pensions stress test' over defining a percentage allocation of growth and matching assets. TPR suggests that, initially at least, using the PPF stress test would be appropriate.

The Fast Track threshold - defining a maximum level of investment risk

TPR considers how to define an acceptable maximum risk level for mature and immature schemes under the Fast Track, noting that the investment strategy should be consistent with the scheme's funding strategy and broadly align with the scheme's technical provisions and recovery plan.

A significantly mature scheme, having a low reliance on the sponsor, should have a high resilience to investment risk. In TPR's view, an investment portfolio with more than 20% growth assets is unlikely to have a prudent expected return consistent with this low dependency funding basis.

For an immature scheme under Fast Track, TPR considers the following factors relevant in setting investment limits:

  • the shape of the de-risking journey - linear or horizon - ensuring consistency with the assumed journey plan;
  • downside risk in the medium and long term; and
  • determining if an allowance for the strength of the employer covenant should be made.

Pass or fail

If a scheme complies with the stated acceptable investment risk, it satisfies this aspect of the Fast Track approach. If it does not, the trustee can reduce investment risk to an acceptable level or demonstrate, via the Bespoke route, how excess risk can be supported in the scheme.

Dealing with liquidity and quality of assets

TPR states that schemes should have sufficiently liquid assets to meet predictable (e.g. paying pensions) and unpredictable (e.g. transfers out) cash flows. TPR also notes caution regarding the quality of bonds a pension scheme holds. It queries how to deal with these issues and some suggestions include prescribing a minimum allocation of high quality bonds, or a minimum allocation of assets that can be realised in a specified period of time (one day, one week etc.).

Appropriate recovery plans under the Fast Track approach

Recovery plans should be a temporary measure to get a scheme back to full funding as soon as affordable.

TPR's objective is to strike the appropriate balance between sustainability of the employer and risk for the member. For schemes using the Fast Track approach, risk is mitigated by limiting the recovery plans to the period for which there is good visibility on the employer covenant (which TPR says is 3 to 5 years).

What is the appropriate length of a recovery plan under the Fast Track approach?

TPR asks for views on whether recovery plan length ought to be linked to the covenant grade of the employer or if there should be one maximum prescribed length irrespective of this. Illustrative periods are included ranging from 3 to 12 years.

How should recovery plans be structured under the Fast Track approach?

TPR is concerned about recovery plans being structured in a way that minimises contributions actually being paid by the employer. It is seeking views on whether, in light of this, guidelines for Fast Track recovery plans should prohibit back end loading above inflationary increases and / or prescribe a minimum level of deficit reduction contributions (DRCs) (e.g. 50%) to be included in the first half of the recovery plan.

Investment outperformance

TPR notes that some trustees make an allowance for this, assuming higher investment returns over the recovery plan than the prudent assumptions in the technical provisions which reduces the DRCs as well as transparency. TPR proposes to remove trustees' ability to do this under the Fast Track approach.

Future recovery plans

TPR is seeking views on whether re-spreading of existing deficit recovery contributions should be allowed under the Fast Track approach.

Equitability

TPR intends to set clear guidelines about 'value leakage' away from schemes. TPR acknowledges that this will be challenging since each employer/scheme is so different. TPR suggests that trustees might need to reflect any leakage in the assessment of covenant strength as well as supply evidence supporting why the leakage is necessary in preference to the scheme. This might mean that where employers have paid dividends or bonuses trustees will have to use the Bespoke approach.

The Bespoke approach in more detail

TPR states that it does not want to either discourage trustees and employers from using the flexibilities available to them, or, to undermine trustees who simply cannot submit Fast Track compliant valuations (e.g. stressed schemes) and that whilst Bespoke arrangements may receive more scrutiny from TPR, they are not 'bad' if done properly.

What 'good' looks like involves assessing a scheme's proposed Bespoke funding arrangements against four criteria:

  1. the need to be compliant with legislation and any relevant defined benefit code principles;
  2. the need to understand how it compares with the Fast Track equivalent (in broad terms the relevant tolerated level of risk accepted in the Fast Track framework with relevant being based on the scheme's maturity and - depending on the outcome of the consultation - the strength of the employer covenant) and to assess the outcome as:
  • at least as good;
  • weaker overall; or
  • running additional risk;
  1. the need to demonstrate how any additional risk is being managed through mitigation and/or additional support; and
  2. the need to fully articulate - in the statement of strategy - the scheme specific position and to provide tangible, robust evidence of why the Bespoke option has been chosen and how (if relevant) the additional risk is being supported or mitigated.

More clarity on what 'good' looks like is provided through worked examples which identify differences to the Fast Track equivalent:

The following examples would be assessed as "compliant - no additional risk" by TPR (i.e. in these cases the Bespoke arrangement is at least as good as the Fast Track equivalent so no additional support or mitigation required)

  • LTO - different assumptions - this example sees the trustees adopt mortality rates significantly higher than the standard mortality table and a long term rate of improvement slightly lower than the assumption recommended under Fast Track. This more conservative approach is based on the scheme's mortality rates and that the scheme-specific mortality rates that have been worse than the UK population average (and which are not improving as quickly); and
  • LTO - cash driven investment strategy - this example, the scheme fails the Fast Track investment stress threshold but the trustees explain that the failure is caused by the level of corporate exposure and that the stress test is only applied to specified asset maturity categories. The trustees demonstrate there is sufficient liquidity to deal with unexpected cash flows (for example, transfers out). The expected return overall and the average credit quality is consistent with what TPR would expect from a portfolio with a high resilience to risk.

The following examples would be assessed as "compliant - additional risk is managed" by TPR (i.e. in these cases, the Bespoke arrangement gives rise to additional risk but this had been assessed by the trustees and supported and/or mitigated).

  • Low dependency targeted later than significant maturity;
  • Back-end loaded recovery plan;
  • Long recovery plan;
  • Stronger technical provisions but longer recovery plan;
  • Underpinning employer covenant with a parent company guarantee;
  • Weaker technical provisions based on a strong long-term employer covenant;
  • High allocation of growth assets with a strong covenant;
  • Open scheme with weaker technical provisions; and
  • Technical provisions inconsistent with the LTO, due to the absence of a journey plan (although this one would be classed by TPR as "potentially not compliant").

The above examples are varied and all very fact specific. However, the common theme is TPR looking to trustees to show they have actual, relevant evidence to explain and support the position taken. In these compliant examples the trustees were all able to explain and demonstrate:

  • that they had obtained appropriate data and/or reports and/or advice to properly consider their scheme specific situation; and
  • that, as necessary where an additional risk was identified, they had assessed the risk and gone on to take reasonable and appropriate further action to mitigate and/or support that risk.

TPR also sets out its thinking in some detail in relation to the trustees' approach to risk assessment and the application of the principle underpinning accounting for additional support in their valuations. This is based around four key considerations:

  1. Assess - trustees need to identify the additional risks arising from the Bespoke arrangements (as relative to the tolerated level of risk in the Fast Track equivalent).
  2. Access - trustees need to understand when or in what circumstances will those risks crystallise and therefore when the additional support will be needed. Trustees should be able to explain clearly why they are satisfied that the support provided is acceptable. Trustees should also not release their claim over the support while the additional risk persists.
  3. Quantum - trustees should assess how much support will be needed in those circumstances. As a minimum TPR expect Trustees to determine this by reference to the difference between the Fast Track equivalent and the Bespoke arrangement. Trustees should ask themselves whether the support would be able to put the scheme's funding back in the position it would have been in had the Fast Track been followed.
  4. Quality - Trustees need to assess whether the additional support (asset or guarantee) will have the necessary value at that time and that it will be legally accessible/enforceable. TPR also expects trustees to be able to demonstrate and evidence how the scheme would be able to access the additional support in a way that would not cause damage to the employer covenant or the sustainable growth of the employer.

Although TPR refers to contingent assets and guarantees as the main forms of support that might be available to trustees, it also recognises the following as other types of arrangements which may assist trustees in minimising risk: negative pledges; contingent contributions (scheme funding-linked); contingent contributions (employer performance-linked); and blended support.

A note of caution is expressed in relation to alignment with the PPF regime for PPF levy reduction purposes, where trustees are looking to put in place appropriate support for a Bespoke arrangement, as there is likely to be differences in both the amount and the release terms, and trustees may need to take additional advice on the documentation and support required for their Bespoke funding arrangement.

TPR recognises that for some schemes there will be reasons why the trustees and employer cannot agree to a funding arrangement that meets the above criteria. The example given is stressed schemes which are poorly funded and whose sponsor is too weak to adequately fund the scheme and which often have very long recovery plans or take unsupported investment risk. TPR states that it would expect trustees of such schemes to:

  • meet the technical provisions and Investment Fast Track guidelines for an employer with the lowest grade of covenant (i.e. covenant grade 4 - weak) and report a long recovery plan under the Bespoke regime supported by evidence demonstrating how affordability has been assessed;
  • take steps to limit the risk of the scheme's position deteriorating; and
  • maximise the support available to the scheme.

TPR further acknowledges that there is little that schemes (or TPR) can do where the scheme is so 'stressed' that the scheme actuary is unable to certify the schedule of contributions as they cannot confirm that in their opinion the statutory funding objective will be met by the end of the recovery plan. TPR hopes that the new funding regime will enable it to assess the extent of this problem so as to facilitate discussion of possible solutions.

What do trustees and employers need to do next?

Review the First Consultation

TPR states that it does not expect that its new proposed approach will be too onerous for most schemes to implement. This is partially borne out in pensions industry surveys. According to Aon's Pension Risk Survey 2019:

  • 92% of schemes surveyed claim to have an LTO;
  • the majority (78%) are targeting either buy-out or 'strong' forms of "self-sufficiency"/low-risk positions; and
  • two out of three schemes are planning to reach their long-term target within 10 years.

The Revised DB Funding Code will, however, have a significant impact on some schemes. This will be especially the case if their investment strategy is unusually risky and/or it has too heavy a reliance on the employer covenant.

To help you understand the impact on your scheme, Part 5 of the First Consultation contains some worked examples. Trustees and employers can review these illustrations to understand a bit more about how a valuation under the Fast Track approach could work. Illustrative examples are given of the Fast Track funding requirements, as these are not confirmed within this consultation.

Part 5 of the First Consultation also contains the evidence and analysis which forms the background to the proposals and demonstrates an evidence-based approach from TPR.

Decide if you want to respond to the First Consultation

You may want to respond to the First Consultation. We will be submitting a response in due course. If you do not want to submit a full response, but would like to have your say, you can let us have your points and we will endeavour to incorporate them into our response.

Not legal advice

Information made available as part of this Insight or on our website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.


NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

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