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Code of Practice on Funding

Background

In March 2020, The Pensions Regulator issued the first consultation on a new approach to the funding of defined benefit pension schemes. The consultation was open for comments until 2 September 2020. Deloitte responded to the consultation and a summary of the key points of our response is attached.

A second stage to the consultation, focusing on the draft code itself, is expected later in 2021.
 

Brief summary

There is much to like in the new proposals and we believe that, for the majority of schemes, it is likely to improve the security of member benefits.

However, we note that the current scheme specific funding regime, and the introduction of the Pension Protection Fund, has already achieved a good safety net for ensuring defined benefit pension scheme members receive adequate pension provision should the corporate sponsor fail. We are concerned that the proposals outlined in the consultation document could increase the cost of making legacy DB schemes (slightly) more secure, directing funds away from other corporate sponsor stakeholders such as shareholders and current employees who will likely need to rely on a much less generous DC pension offering for their retirement needs.

Our ‘response to consultation’ document (attached) provides more on our response to the proposals and since then the Pensions Regulator has published an ‘interim response’ to the consultation, details of which can be found here.

Impact of market falls and regulatory regime change on pension funding

The combined effect of market volatility and the pensions regulatory regime change signalled above could mean a massive increase in company contribution requirements for some pension schemes. These increases are avoidable though –without compromising pension scheme member benefit security –through careful planning.

The attached note covers the main issues and a high level view of mitigating actions. This was also addressed in the first of our four part series of webinars – a link to the recording can be found here.

Impact of market falls and regulatory regime change on pension funding

Alternative long term funding and investment strategies

One of the key factors in potentially increased contribution requirements will be the way in which Long Term Funding Targets are set. There are alternatives to the default positions implied by the initial consultation, which sponsors and trustees should consider. For example what might be the role of contractual investment income in setting a suitable low dependency Long Term Funding Target and how might this differ from where TPR’s Fast Track parameterisation might ultimately end up.

This was addressed in our second webinar, which provided a deeper dive into how alternative funding and investment strategies centred around credit markets can reduce the cost and / or risk associated with reaching a Long Term Funding Target. A link to the recording can be found here.

Deloitte Pensions Lab

Our Pensions Lab will help you help to assess the issues and agree actions, more details can be found here.

Pensions Lab
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