TPR funding code consultation — the Regulator speaks

The new draft funding code for defined benefit (DB) pension schemes has raised many questions.

That’s why we held a webinar with David Fairs, the Pensions Regulator’s (TPR) Executive Director of Regulatory Policy, Analysis and Advice. More than 400 people tuned in to hear David setting out what TPR expects of DB schemes based on the draft code.

Mercer’s Charles Cowling, Chief Actuary, and Kirstie Nicholls, Pensions Actuary and Consultant, hosted the webinar. The session covered lots of ground and it is well worth taking the time to watch it here. This article gives you a flavour of some of the subjects discussed. We will publish more soon.

David said TPR expected to publish the code in June and for it to take effect in October. DB schemes whose actuarial valuation dates are before October 2023 will not be subject to the new code, he said.

Fast-track explained

TPR proposes two approaches for submitting actuarial valuations. Schemes can opt for a fast-track option where they meet certain criteria. Schemes that want to take on more risk can choose a bespoke option.

David said TPR had changed its view of the proposed fast-track route after its consultation in 2020 raised concerns that fast-track would be viewed as a benchmark and drive behaviour.

Here are some points that David made about fast-track:

• Fast-track is no longer a benchmark and shouldn’t be viewed as an ultimate goal by trustees and employers.
• TPR sees fast-track as a way to filter out schemes that are within its risk tolerance so it can concentrate on schemes taking the bespoke route.
• It may be appropriate for DB schemes to set a funding target that is above the fast-track standard — for example if the covenant is under stress.
• If schemes are well ahead of the fast-track standard, TPR would like them to proceed towards a smooth resolution but it accepts that some sponsors may want to slow down their funding.
• Fast-track isn’t a zero-risk journey; it’s a tolerated-risk journey and a filter for where TPR will direct its attention. 

Volatility could prompt tweaks to duration calculation

Recent volatility in the market has raised questions about using duration to set a target because it is sensitive to changes in interest rates. David said duration remained attractive but that TPR would look at ways to iron out volatility. He said options include defining the rate of interest used in the calculation, using an average interest rate over a period of time or choosing a completely different measure. 

Covenant strength is key

TPR has emphasised the importance of longevity, reliability and visibility in assessing the strength of a DB scheme’s covenant. He explained what TPR means by each element:

•  Longevity: how long is the sponsor likely to be around for? If there are questions about the employer’s viability, the trustees may need to target a higher funding level or call in contributions at a higher rate over a shorter period to reduce reliance on the employer.
• Reliability: what is the period over which the trustees have good sight and reasonable certainty over cash flows to fund the scheme? Schemes should be careful about running risk beyond the point when there is covenant reliability. TPR will tolerate risk depending on scheme size but the period over which risk is run needs to be consistent with covenant reliability.
• Visibility: over how long a period will the trustees have good sight of employer plans and financial projections?

David’s closing message was: “A long-term objective, journey plan, and understanding risks are things we’ve been saying for a long while and if you haven’t done that then now’s the time to get on board. It’s a good idea to look at what’s in the new code and what’s coming and to plan appropriately, particularly for those schemes that are heading towards significant maturity.”

View the webinar here and keep a lookout for further articles in which we will cover subjects raised in more detail.