The Pension Regulator (TPR) has today published its Code of Practice encouraging trustees and sponsoring employers of defined benefit (DB) schemes to work “collaboratively” in an “open and transparent” way to address scheme funding.
The code, which was subject to several months of extensive consultation, has today been laid before Parliament and, subject to that process, will come into force in the next few months.
Compared to the previous code published in 2006, the revised version places more weight on maintaining a strong pension plan sponsor by urging trustees and employers to adopt what TPR has termed an “integrated approach” to risk management across the key risk areas to funding plan success – employer covenant, investment and funding-related risks.
TPR explained that it recognised “a strong ongoing employer alongside an appropriate funding plan provides the best support for a well-governed scheme”.
TPR interim chief executive Stephen Soper said: “The revised DB funding code and strategy set out our expectations of trustees, and how we will balance our current member and PPF protection objectives with our new objective to minimise any adverse impact on the sustainable growth of an employer.
“In the vast majority of circumstances, trustees and employers should be able to agree funding plans that both benefit the business and strengthen the scheme’s long-term security – but this can only be achieved by employers and trustees working openly and collaboratively.”
KPMG pensions partner Mike Smedley welcomed TPR’s more “balanced” approach to the code and recognition that a strong employer is the best security for pension scheme members; as well as being good for employees and the economy generally.
“This is more appropriate than driving pension funding to ever higher levels,” he said. “Particularly when the market conditions that pension schemes are struggling with – such as quantitative easing – may be temporary.
“To illustrate the change in tone, parts of the regulator’s old guidance stated that deficits should be met ‘as quickly as reasonably affordable’. But now, deficit recovery plans should be ‘appropriately tailored to the scheme and employers’ circumstances’. Consequently, a strong employer will no longer be under pressure to meet a deficit very quickly at the expense of investment in the business.”
Elsewhere, Towers Watson senior consultant Graham McLean said: “The government has told the regulator to ‘minimise any adverse impact on the sustainable growth of an employer’. Now, the regulator has copied and pasted this phrase when setting out what it expects trustees to help deliver – even though trustees’ duties to scheme members have not been watered down. This is the main change from the draft code that was published in November and looks like a lobbying victory for employers – though the regulator still emphasises that trustees need to understand and manage risk.”
Key changes to the code, funding policy and strategy, following the consultation include:
– Shortening the code by 20 pages.
– Using the precise Pensions Act 2014 wording of the new objective throughout the code.
– Demonstrating more clearly a more proportionate and positive stance with regard to risk (eg referring to ‘managing’ rather than ‘mitigating’ risk and emphasising more clearly the potential rewards from upside risk).
– Changing the emphasis on reasonable affordability, away from repaying deficits as quickly as reasonably affordable, to considering the appropriate period in which do so in view of the risks to the scheme and impact on the employer.
– Making changes to the sections on contingency planning and covenant assessment to be more realistic and proportionate.
– Ensuring that proportionality is properly referenced and emphasised throughout.
– Making clear that trustees do not need to scrutinise key business decisions made by employers unless employers are seeking to prioritise investment in the business over funding the pension scheme.
– Renaming the Balanced Funding Outcome indicator the ‘Funding Risk Indicator’ and clarifying the use of this as just one of a broad range of risk indicators for case selection.
– Making clear that we are not exclusively focusing on large schemes (including providing some statistics demonstrating that we have engaged with a significant number of small and medium-size schemes and stating that we expect to continue to do so).
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