New Defined Benefit Scheme Funding Regime

Given that changes to the UK’s defined benefit (DB) pension scheme funding regime were first signposted in a 2018 White Paper. you could be forgiven for forgetting that changes were afoot. Indeed, it has been some time (pre-lockdowns in the UK) since we first heard the terms “Fast track” and “Bespoke” from the Pensions Regulator (“TPR”). Since, there have been consultations from both the DWP and TPR.

A summary timeline of events is set out in our June 2022 briefing note, available to download here.

On 26 July 2022, after what felt like a long wait, the DWP published its consultation on the new defined benefit funding regulations that will implement the provisions of the Pension Schemes Act 2021. The consultation gives more colour to some of the features of the new funding regime but more is still to come in a further consultation expected from the Pensions Regulator on the new funding Code of Practice later this year.

The material points of the DWP consultation document together with some of the key points for pension scheme sponsors and trustees to consider are outlined in our briefing note, available to download here.

Following on from the DWP consultation in July on the draft Scheme Funding and Investment Regulations, we have published thought pieces linked to some of the key themes of the new defined benefit scheme funding regime.

Duration impact

TPR’s first consultation on a new funding Code of Practice and subsequent draft regulations published in July of this year make clear the intention to require all pension schemes to reach “a state of low dependency on their sponsoring employer by the time they are significantly mature”, where “significantly mature” is expected to mean when a scheme has a duration of 12 years or less.

In our article, available to download here, we consider the impact of recent gilt yield rises on scheme duration and how this and recent market movements may impact on scheme funding.

Low dependency

As above, TPR’s draft regulations make clear the intention to require all pension schemes to reach “a state of low dependency on their sponsoring employer by the time they are significantly mature”, with a “low dependency” asset allocation meaning it is able to deliver cashflow in support of scheme liabilities with low levels of investment and funding risk.

In our article, available to download here we consider if trends in market conditions have made low dependency more attainable.

Endgame

The consultation and regulations acknowledge that pension schemes may "...’run on’ with low dependency on the employer when they reach significant maturity, while others may target entering a consolidator or securing buy out with an insurer.

In our article, available to download here we consider how low dependency can be dovetailed with your endgame target.

Alternative funding options

We anticipate the new Code and recent market events could drive increased use of alternative funding options including contingent assets which are specifically referenced in relation to employer covenant in the draft regulations.

In our article, available to download here we consider what alternative funding options are available to schemes.

Draft funding regulations were published in July, requiring schemes to reach “a state of low dependency on their sponsoring employer by the time they are significantly mature”. On 16 December, the Pensions Regulator published a draft Code of Practice filling in the details of the new funding regime. They also published details of their twin-track regulatory approach: Fast-Track and Bespoke.

We set out a short summary of the draft Code and regulatory approach and a few of our thoughts and suggested actions in our briefing note, available to download here.