ICAS responds to The Pensions Regulator’s DB Funding Code of Practice consultation
The ICAS Pensions Panel has responded to The Pensions Regulator’s proposals for a new Funding Code of Practice for Defined Benefit pension schemes.
The Pensions Regulator (TPR) is planning to issue a new Funding Code of Practice for defined benefit (DB) pension schemes and the new Code may be finalised in 2021. As the DB sector matures, TPR is looking to establish an enduring approach to its oversight of DB schemes.
The ICAS Pensions Panel has responded to the first of two consultations on the new Code. This first consultation is about the broader principles expected to underpin the new Code and a proposed new twin track approach to compliance, with a lighter touch fast track route being available to schemes which meet the criteria and a bespoke route for other schemes.
Why is a new Code being planned?
The backdrop to the development of the new Code includes concerns about the impact on DB schemes, scheme members and the Pension Protection Fund (PPF) of high-profile corporate failures.
Regulations flowing from the new Pensions Schemes Bill (2019-21), currently awaiting its second reading in the House of Commons, will support the new Funding Code of Practice.
The COVID-19 pandemic has delayed both the Bill and the development and implementation of the planned new Code. A further TPR consultation on the Code is now expected next year; this will focus on the detailed funding requirements for the new fast-track and bespoke routes to compliance.
About the proposed twin track approach
The ICAS Pensions Panel is broadly supportive of the direction of travel of the proposed regulatory approach, in particular for schemes which are closed to the future accrual of benefits, and we believe that the twin track approach to compliance within the new Code will be a good way of enabling TPR to target its resources more effectively.
The approach will also give clarity to both pension trustees and sponsoring employers as to what is expected of them. We also support the integrated risk management model which will continue to underpin how schemes are managed and regulated.
With the proposed regulatory approach intended to operate over the very long-term and concerns about its impact on the investment strategies of schemes, it would make sense for TPR to undertake a post-implementation evaluation of the twin track approach within five years of commencement.
Impact of COVID-19
Given the impact of the COVID-19 pandemic on the covenants of sponsoring employers (particularly those in the worst-hit industries) and on schemes, it is inevitable that this will impact on the number of schemes likely to be eligible for fast track.
Extremely low interest rates generally and the low rates applied to the calculation of scheme liabilities could also impact on the eligibility of schemes for fast track. There have already been contribution holidays as a result of the COVID-19 pandemic, and this should be considered by TPR in assessing whether a scheme’s recovery plan length is reasonable. Recovery plans may now need to be a bit longer than envisaged in the consultation.
In August, TPR made an announcement recognising that the fast track approach will need to be adjusted to take account of the impact of low interest rates and we welcome this announcement.
Future economic shocks
We believe that the new approach to compliance needs to be sufficiently flexible to deal with any future economic shocks, including the ability to revisit the criteria for fast track as is currently planned in relation to the impact of low interest rates.
Look out for further developments in 2021 when TPR is expected to set out more detailed proposals for the DB Funding Code of Practice.