Changes to the regulations governing funding of defined benefit (DB) pension schemes will make the regulations explicitly more accommodating of risk and increase the scope for scheme-specific flexibility, the UK government has said.
The recently published response to a consultation on the regulations from the Department of Work and Pensions (DWP) sets out a summary of views raised by respondents and includes the final draft of the Occupational Pension Schemes (Funding and Investment Strategy) Regulations 2024.
Following the update “trustees and employers can now start to think about what the new regulations mean for their long-term plan,” Stephen Scholefield, pensions expert at Pinsent Masons said in a briefing note today (2 February).
In recent years there have been significant changes in the world of DB funding, with the position of most DB schemes having improved. “These developments have played out in the changes to the funding regulation, tempering somewhat the initial high level of investment and funding risk aversion demanded of DB schemes,” Simon Tyler, pensions expert at Pinsent Masons said.
According to the DWP, most schemes will not be required to make radical changes to their existing funding and investment arrangements as the regime aims to provide some flexibility.
The primary features of the new regime include the introduction of ‘journey plans’, setting out how schemes intend to achieve their long-term funding goals. DB schemes will also be required to agree on a funding and investment strategy, with trustees ensuring that their scheme is in a state of low dependency on their sponsoring employer by the time is it “significantly mature.”
The Pensions Regulator (TPR) will set out how schemes should measure maturity in due course within the regulator’s final DB funding code of practice.
The new DB funding regime will also see a new approach to pension scheme valuations. TPR has proposed a ‘twin-track’ approach to carrying out valuations, meaning trustees will be required to provide less evidence and undergo less regulatory scrutiny of their valuation compared to previous methods. The specific new requirements are currently being considered and will be published at the same time as the final DB funding code.
The regime provides guidance for pension schemes in relation to testing the strength of employer covenant – the sponsoring employer’s obligation and financial ability to support the pension scheme, now and in the future. The new regime sets out the way in which this should be assessed for the purpose of scheme funding and investment strategy. The guidance requires trustees to determine how long they can be “reasonably certain” that the employer will be able to support the scheme, for example financially.
Subject to parliamentary approval, the regulations will come into force in April and will apply to scheme valuations with effective dates on or after 22 September. Schemes will have 15 months from the effective date of their valuation to agree a new funding and investment strategy and any recovery plans.
Scholefield said: “Whilst there is some additional flexibility around investment strategy and a recognition that trustees can take account of the impact that deficit funding will have on the employer’s sustainable growth, the message remains that significantly mature schemes are expected to operate with limited dependency on the employer covenant.
