Consultation on Draft Defined Benefit Funding Code of Practice
The Pensions Regulator (TPR) has released its second consultation on the Draft DB Funding Code of Practice (the Code).
The new draft Code includes a requirement for a ‘funding and investment strategy’ (FIS) where Trustees of defined benefit (DB) schemes will be required to explain their approach and decisions on funding and investments.
Statement of strategy
Under the Code, Trustees must prepare a written statement of strategy which records the FIS and supplementary details, including matters related to the journey plan, how well the funding and investment strategy is being implemented, and the main risks relating to the strategy and how they are being managed. The statement of strategy must be signed on the Trustees’ behalf by their chairperson, and submitted to TPR with each triennial valuation.
Fast Track and TPR's regulatory approach
Under the proposals, TPR sets out a ‘twin-track’ model where Trustees will be able to choose either a prescriptive ‘Fast Track’ option or a more flexible ‘Bespoke’ approach to completing and submitting an actuarial valuation for TPR's assessment.
The Fast Track approach will act as a filter for TPR's assessment of actuarial valuations. If a valuation submission meets a series of Fast Track parameters, TPR are unlikely to scrutinise it further and it is less likely that TPR will engage with Trustees. One of the criteria for Fast Track is that the scheme actuary must confirm that the submission meets the Fast Track parameters.
Key Fast Track Parameters
| The low dependency funding and investment strategy | TPR expects this to be measured relative to specified minimum financial assumptions (for example a discount rate of no more than Gilts plus 0.5%pa). |
| Duration (i.e. how far a scheme is from being ‘significantly mature’) | 12 years. |
| Technical Provisions | Assessed against a proportion of the long-term funding target, depending on the scheme’s current duration. |
| Investment risk | Measured via a stress test, based on that used to calculate PPF levies. |
| Length of recovery plan | No longer than six years for a valuation before a scheme has reached significant maturity and no longer than three years for a valuation on or after significant maturity. |
| Covenant | The Fast Track does not explicitly take account of covenant strength. |
Trustees who wish to take a different scheme-specific approach, where risk is shown to be supportable, can go down the Bespoke route. The Bespoke approach is intended to allow Trustees to have the flexibility to select scheme-specific funding solutions if the funding approach and actuarial valuation meet legislative requirements and follow Code principles. If the statement of strategy clearly evidences and explains how the approach meets legislation and key Code principles, TPR have indicated that Trustees can still expect minimal scrutiny and engagement with TPR, if any.
The Fast Track parameters are detailed in a document separate to the Code, partly because Fast Track is not in the legislation itself, and a code of practice must set out expectations for compliance with the legislation, and also to provide greater flexibility to change Fast Track, if required, without requiring an amendment to the Code.
Assessing covenant
The new Code will provide expectations for how TPR expects Trustees to assess covenant, but TPR aims to better reflect how the relevant elements of covenant tie into decisions around funding, investment and recovery plans and are therefore reviewing existing covenant guidance and plans to consult on proposed changes to covenant guidance in 2023.
Small schemes
Some simplification of the requirements (for example in relation to how Technical Provisions are calculated, or how duration is assessed) will apply to small schemes, which in this context is schemes with fewer than 100 members.
Effective date
The final regulations, The Occupational Pension Schemes, Funding and Investment Strategy and Amendment and the Code are expected to come into force for valuation dates on or after 1 October 2023.
Responses to the second consultation on the draft Code, and the separate Fast Track and TPR's regulatory approach document, are required by 24 March 2023.
The consultation can be accessed here.
For further information, please contact your usual Crowe contact or Shona Harvie FCA, Partner.
