The UK's workplace pensions industry is largely supportive of The Pensions Regulator's (TPR) long-awaited defined benefit (DB) funding code consultation, but concerns have been raised over the need for "such detailed regulation".

The consultation - launched on Friday (16 December) and set to run for 14 weeks - sets out expectations of final salary schemes to set a long-term objective and a journey plan to get there, reports sister website Professional Adviser.

The Association of Consulting Actuaries (ACA) welcomed the consultation on the new funding code, with chair Steven Taylor praising the scale and ambition of the proposals as "admirable".

However, he argued: "A key test for the new code will be how it enables the continued smooth transition of DB schemes to their endgames without disrupting well-planned scheme-specific approaches or introducing new hurdles or compliance costs.

"Within the detail of the code itself, it will also be important to closely examine the read across to Department for Work and Pensions' (DWP) regulations as, unusually, these are expected to continue to evolve in the New Year. The ACA would like to see less prescription in DWP's final regulations, to ensure that TPR's vision for scheme-specific bespoke funding is viable in practice.

"At a system wide level, the code does not set out to drive significant behavioural changes around liability-driven investment. However, it will be important in due course to examine the impact of the new code alongside any future regulatory steps in this area."

Isio suggested the new code "is a solution in search of a problem".

Head of research and development Iain McLellan said: "TPR's draft DB funding code will introduce more detailed requirements for trustees and sponsors of DB pensions schemes to address, signalling a move from a more principle-based approach to a more mechanistic one.

"As such, it feels more like a Haynes manual than a Highway code."

He argued the flexibility in the code will be welcomed, but "it begs the question of why we need so much detailed regulation if it will have such little impact".

"This seems to run counter to the general thrust of the government's de-regulation agenda and Hunt's commitment to delivering ‘agile and proportionate' regulation as part of the Edinburgh Reforms. It is unclear why the noose is tightening on DB schemes whilst insurers for example get more flexibility. It also ignores the changing landscape from when the green papers that kicked off these reforms were published in 2017.

"Most pension schemes have never been better funded, the Pension Protection Fund is running a huge surplus and most schemes are within ten years of being able to buyout. Looking at the complex draft funding code in this light doesn't feel proportionate and it now reads like a solution looking for a problem.

"The rules should be more targeted and directed at poorly-run schemes, so that well-run schemes can get on with securing members' benefits without distraction by more well-meaning but inconsequential regulation."

Pragmatic package

Lane Clark & Peacock welcomed TPR's "pragmatic approach in key areas", but warned "concerns remain".

Partner Jon Forsyth said: "This long-awaited bumper set of documents is now helpfully putting some more workable detail on the future of DB funding and investment regulation, but it also highlights that the DWP's regulations now need to catch up with TPR's thinking.

"Just a few months ago, DWP published proposed rigid new rules which would have forced all schemes into a straitjacket, required many sponsoring employers to put more money into their pension schemes, and could have resulted in dozens of sponsoring employers being forced out of business."

He added: "By welcome contrast, TPR has come up with a more pragmatic package, allowing some schemes to continue to take investment risk for much longer where appropriate, and indicating that recovery plans of up to six years might be acceptable even if employers can afford to pay off deficits quicker than that. But this doesn't fit with the draft regulations, and we'd urge TPR and DWP to work closely together over the coming months to ensure TPR's more pragmatic approach is reflected in the final regulations.

"Although there is some initial analysis of the potential behavioural impact of the new regime, neither TPR nor DWP has yet published a full assessment of what they think these new rules will mean for schemes, making it very hard to evaluate what has been proposed. For the DB pensions world to know where it really stands, TPR and DWP need to set out a coherent and co-ordinated set of proposals which fit together - we're yet to see this."

Aon partner and head of UK retirement policy Matthew Arends suggested the whole process of consultation "has been piecemeal" and although TPR is aiming to show a complete view, "this means more changes will be required if the final regulations are altered following that consultation".

"The industry didn't have the response to TPR's first consultation before the DWP consulted on the regulations, and the response to that consultation won't be until after TPR's second consultation has completed. Additionally, the consultation on the employer covenant guidance won't start until later in 2023. Is that conducive to getting the right result?

"Equally, while TPR has used a liberal interpretation of the funding regulations now, it doesn't mean they always will. There is still a risk of a strengthening of the regime in the future."

Cardano Advisory managing director Emily Goodridge noted: "It is really positive to see TPR looking at covenant over a scheme's journey plan, taking into account concepts such as visibility, reliability and longevity of covenant. However, we have reservations about a relatively prescriptive "one-size-fits-all" approach to assessing supportable risk.

"There is a risk of mixed messaging. On the one hand, covenant is seen as key to supporting scheme risks over a journey plan and on the other hand, the parameters to satisfy the "fast track" regulatory channel do not include any covenant metrics.

"Trustees should focus on the expectations set by the draft regulations and draft funding code, and not just on whether TPR will check up on them. Fast track is essentially just a way for TPR to proportionately filter valuations on a risk basis. It is not a gold standard, and is absolutely not an excuse for becoming complacent about covenant, particularly given the challenges many employers are facing at present and their role as the ultimate underpin for a defined benefit pension scheme."

Encouraging proposals

The Pensions Management Institute welcomed the code. Director of policy and external affairs Tim Middleton said: "We are greatly encouraged that the new funding code addresses the key issues affecting the UK's remaining DB schemes.

"Trustees now have clear guidance concerning the development of a route to full funding which fully recognises the importance of the employer covenant in achieving independence. The clarity of guidance will greatly encourage trustees as they manage a complicated task in a time of particularly volatile economic conditions."

Dalriada professional trustee Vassos Vassou welcomed the code, particularly the changes to fast track - dropping the idea of a hard fast track, and to have it used as a filter for valuations.

"We notice the emphasis placed on the primacy of covenant for all schemes including small schemes, where historically the costs of completing a thorough covenant analysis have been prohibitive.

"However, recent market movements have improved scheme funding levels for many schemes meaning that those schemes' reliance on long-term employer support has diminished," he said.

The consultation closes to responses on 24 March 2023.