02 December 2013

UK Pensions Regulator: Defined benefit consultation - Setting a balanced approach

Striking a balance between sponsoring employers’ pension funding obligations and their ability to invest in sustainable business growth is at the heart of a consultation on defined benefit (DB) regulation published by The Pensions Regulator. The content of the consultation also reflects how the regulator’s approach to DB funding has evolved over the last eight years in light of its experience, and that of the pensions sector, in managing the risks in DB schemes.

The consultation includes:

• A draft funding code of practice that provides practical guidance to help pension trustees to meet the requirements of scheme funding legislation.
• A draft regulatory strategy setting out at a high-level the regulator’s risk-based approach to tackling issues in DB pension schemes.
• A draft funding policy describing in more detail the regulator’s intended approach to regulating DB funding issues.

Stephen Soper, the regulator’s interim chief executive, said:  “We welcome the transparency that our new objective on employer growth brings to the DB funding regime and we look forward to working with trustees, employers and the wider pension community to ensure that it is implemented in a balanced way. Investing in sustainable business growth is central to being able to provide a long-term future for any business and its pension plan. The best support for a DB pension is a strong employer and effective trustees working together to manage and balance the risks to their business and scheme.”

“Our revised code of practice emphasises the importance of pension trustees and employers working collaboratively to establish viable, long-term funding plans. We place a strong focus on education and enablement to help schemes to achieve appropriate outcomes. The needs of employers and schemes can be reconciled in the vast majority of cases through good working relationships without the need for our involvement.”

Risk is part of the DB landscape and the regulator expects trustees to understand and manage risk rather than requiring them to eliminate it from their scheme. To help trustees in this area, a key focal point of the draft code is on taking an integrated approach to managing the key risks that influence a DB pension scheme’s chances of paying its benefits in full: namely funding, investment and the employer covenant (the employer’s ability to meet its obligations to the pension scheme).

As signalled in its May 2013 funding statement, the regulator has also moved away from a rigid focus on discrete triggers such as recovery plan lengths and discount rates and has adopted a suite of risk indicators built around the key areas of employer covenant, investment and funding. Trustees who manage these three areas, alongside good scheme governance, are less likely to be the focus of regulatory intervention.

The regulator intends to hold a series of events and meetings with key industry stakeholders and experts during the consultation period in order to gather their feedback on both broad principles and narrow technical issues. The consultation period closes on Friday 7 February, 2014. It is anticipated that the new code will be in force by July 2014 and will apply to schemes undertaking valuations from that time.

Once the code has come in to effect, the regulator intends to produce more accessible ‘quick guides’ for trustees and employers and to update its Trustee toolkit, e-learning modules, and other regulatory guidance material for DB schemes.

Full consultation

Full press release

Helen Forrest, Head of Policy and Research at the National Association of Pension Funds, said: “We are pleased to see that The Pensions Regulator (TPR) recognises that collaboration between employers and trustees is crucial in establishing viable, long-term funding plans for DB schemes. We also note the Regulator’s focus on a more integrated approach outlined in the draft code. These are both areas that the NAPF has made clear required more flexibility.

“The NAPF will respond in full to the consultation and will also arrange meetings between the Regulator and a number of our members, to ensure that the principles-based approach of the code can be clearly applied and understood by different types of schemes, such as multi-employer and charity schemes.”

Full press release

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