The recent consultation on the Code of Practice for funding Defined Benefit (DB) schemes is clear on the Pension Regulator’s intention to improve risk management by trustees and increase resilience in the industry. To do this it is looking to direct its resource to where it is most needed by introducing a new, low risk “Fast Track” approach for funding strategies which meet the Regulator’s requirements.
We, at TPT, are well placed to support sponsors and protect members’ benefits under the new regime since we are already applying many of the best practice approaches listed by the Regulator.
At face value, sponsors may be under more pressure to close deficits more quickly. Many trustees may see the new rules as an opportunity to seek higher contributions, which in some cases may be the most appropriate course of action. However, if risks inherent in the strategy are appropriately managed, we do not believe this is an inevitable outcome. Trustees such as TPT with access to the expertise and resources to effectively assess and manage risk are more likely to be able to successfully identify appropriate strategies and elect to use the bespoke route where appropriate.
Introducing a fast track approach will provide guidance and a benchmark of what is considered acceptable. However, trustees with limited resources may see fast track as the desirable outcome and rule out approaches that may be more appropriate but would need to pass though the higher effort bespoke route. The right level at which to set the fast track bar is complex. It needs to be simple enough to be useful in practice and clearly understandable. However, to achieve the objective of directing the Regulator’s resources where they are most needed, it will also need to account for the sophisticated risk management and oversight used by large schemes and those run by consolidators such as master trusts. In our view, the requirement to meet the fast track should not be assumed as the "correct" answer for all schemes and it is important that submissions under the "bespoke" part of the regime are considered on their merits.
Overall, we are supportive of the intentions of the revised Code of Practice and see many parallels with current TPT practice. However, there are a few areas, including those mentioned here, where caution is necessary to ensure the new regime achieves the Regulator’s objectives of securing member benefits without hindering the sustainable growth of sponsoring employers.
We continue to monitor the development of the DB Funding Code closely and look forward to the publication of the second consultation later in the year.