The DWP has published its long-awaited consultation on the draft Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2023 (“the regulations”).
With over 10 million people across the UK in defined benefit (“DB”) schemes, and £1.7 trillion of DB assets under management, the consultation sets out “measures to boost protections” for members of these schemes.
- asks that DB schemes have a “funding and investment strategy” in place that is reported to The Pensions Regulator (“TPR”) via a “statement of strategy”;
- invites comments on proposals to amend legislation in relation to scheme valuations; and
- details a new requirement for DB schemes to appoint a Chair where they do not already have one.
As far back as a 2018 White Paper, the Government proposed strengthening TPR’s ability to enforce DB scheme funding standards to ensure schemes adopt a long-term view when setting their funding objectives. The Pension Schemes Act 2021 finally set out the framework for the new regime, and the regulations now add some of the detail.
TPR’s forthcoming revised DB Funding Code of Practice (“the Code”) will address these requirements, as well as TPR’s updated approach to regulating DB funding. The first stage of its code consultationwas published back in March 2020, setting out proposed principles. Since then, there has been a delay while TPR and the DWP responded both to feedback and the evolving economic and funding landscape, and sought further engagement from key stakeholders.
The measures under consultation are designed to contribute to “better and clearer” funding standards, and to “support trustees and employers to plan their scheme funding over the longer-term”, embedding good practice and requiring greater reporting.
The government states that the regulations aim to retain “a flexible, scheme-specific approach. It is neither ‘one size fits all’, nor about micro-managing schemes. Every scheme will be treated on its merits.”
Whilst schemes that are maturing “will be required to manage their risks carefully” as they move towards securing members' benefits, those that are open and well-supported will not be pushed to undertake “inappropriate derisking of their investment approaches.”
The regulations also aim to enable TPR to intervene more efficiently “to protect members when needed”: schemes will submit a statement of strategy (see below) alongside their scheme valuation. TPR will then be able to engage “robustly” with a scheme that appears to be falling short
The consultation runs until 17 October 2022. TPR has confirmed that it will take the draft regulations into account as it shapes its new Code, which it expects to consult on in the autumn.
The regulations in detail
Funding and investment strategy
This new requirement asks DB trustees to establish, review and, if necessary, revise a “funding and investment strategy” that looks to ensure pension and other benefits can be provided over the long term. Schemes should note that determining the strategy requires sponsor agreement.
The regulations define how schemes must give effect to this requirement, looking at the maturity of a scheme (how far a scheme is through its lifetime), asset allocation (at a high level), and employer covenant (which is defined in the regulations), among other things. By the time a scheme reaches “significant maturity”, it should have “low dependency” on the employer in relation to both investment and funding. Schemes that already factor in de-risking with maturity may already be somewhat prepared; those with weak covenants are likely to be looking at more significant changes in strategy. TPR’s revised Code will contain more detailed guidance and specification on how to comply with legislative requirements in setting the strategy.
Schemes will need to ensure their targets and strategy are reassessed regularly in light of economic changes
In terms of timing, the funding and investmentstrategy will be required alongside a scheme’s actuarial valuation, and reviewed at each cycle (but also as soon as reasonably practicable after any material change in the circumstances of the pension scheme or employer).
Statement of strategy
Schemes will be expected to submit a “statement of strategy”, signed by the chair, to TPR alongside their valuation: this document requires trustees to assess progress against targets, and whether their funding and investment strategy is being successfully implemented. It must also set out what action the trustees intend to take in the event that risks identified as facing the scheme in implementing their funding and investment strategy materialise.
The statement of strategy must be reviewed as soon as reasonably practicable after any review of the scheme’s funding and investment strategy, whether or not any changes are ultimately made to the funding and investment strategy.
The form of the statement of strategy and the submission process will be specified by TPR.
Proposed amendments to the valuation legislation
The regulations also contain draft amendments to the Occupational Pension Schemes (Scheme Funding) Regulations 2005.
- make provision regarding the calculation of technical provisions;
- require additional matters to be included in an actuarial valuation; and
- add conditions for determining whether a recovery plan is appropriate having regard to the nature and circumstances of a scheme.
DB scheme chair
Finally, the regulations propose requiring DB schemes to appoint a chair (where they do not already have one). The chair can be an individual trustee, director of a trustee company, or a professional trustee body.
What the regulations don’t cover
- The regulations do not cover the “Fast Track” and “Bespoke” funding concepts introduced by TPR’s first DB funding consultation, and so we await detail in the forthcoming Code consultation.
- Currently, the point at which a scheme is deemed ‘significantly mature’ stands to be defined by the Code, although the consultation asks whether it would be better for this to be set out in the regulations.
- The regulations include an ‘affordability principle’: that funding deficits should be recovered as soon as the sponsoring employer can reasonably afford to do so – a stronger stance than the current one. However, they do not define what may be appropriate in terms of recovery plan length.
- Matters to be considered in assessing the financial ability of the employer to support the scheme, such as the employer’s cash flow and ‘other factors which are likely to affect the performance or development of the employer’s business’, will also be detailed in the Code.
What actions should schemes take now?
- Read the new proposals, and consider how the requirements will apply and impact your current funding approach.
- Engage in discussions between trustees and sponsors to start agreeing the scheme’s targets and long-term journey now.
- Have an eye to the new requirements in current / forthcoming valuations.
- Employers should commit to keep trustees informed of any issues that may impact covenant or scheme funding.
- Consider appointing a chair if one is not in place.
- Watch out for TPR’s second Code consultation on DB funding in the Autumn, and the finalised regulations; the current aim is for the new regime to come into force by September 2023.