Normally our newsletter covers several topics, however this month we have given our newsletter over to the latest TPR consultation. Read the gist here
New DB Funding Code – TPR Consultation Launched: On 16th December, TPR launched its anticipated consultation on its draft funding code of practice for DB schemes, at the same time TPR has opened a consultation on a ‘fast-track’ funding valuation approach. This draft code is based on draft DWP Regulations (on which consultation has only recently finished) so there could be further changes if the final regulations are amended following the consultation. After the delays over the last 2-3 years the intention is to introduce the Code in October and Regulations before then but this could change.
The length and complexity of these documents presents a huge test to those who need to read and understand them. The new regime contains multiple new requirements for trustees when completing valuations that will necessitate a new process in many cases that is built around an initial covenant assessment. Unfortunately for many well-run small schemes this Code introduces more red tape – new documentation to be prepared, a greater emphasis on demonstrating covenant and potentially greater TPR scrutiny if you don’t adopt the prescribed fast-track approach. This in turn will lead to higher adviser costs and more time commitments for trustees in schemes which are already well run.
There are some concessions for schemes with less than 100 members but we believe TPR could go further. As “the voice of small schemes”, we will be making our views clear in our response to the consultation. We have highlighted below some of the new requirements.
Statement of Strategy. The trustees will need to prepare a “statement of strategy”. This will have two parts. Part one will be the “funding and investment strategy (FIS)” setting out the journey plan to “low dependency on the employer” by or before the “relevant date”. Part two will, among other things, identify the main risks in implementing the FIS, with employer covenant as a key consideration, and how the trustees intend to manage them, and record progress, and identify any actions needed to get the strategy back on course.
The ‘relevant date’ must not be later than the end of the scheme year in which the scheme is expected to reach ‘significant maturity,’ which is defined as the point at which the scheme has a 12-year technical duration. Our concern is that with the increase in yields since the DWP draft Regulations, many schemes may be at, or near this point already. As currently drafted, trustees would need to make immediate changes to their funding and investment strategy.
At the point of ‘significant maturity’, the low-dependency investment allocation may allow up to 30% in growth assets where there is some form of leveraged LDI in place. Schemes will be expected to conduct a stress test that shows no more than a 4.5% change in funding level based on a 1-in-6 downside event.
The trustees will need to consult the employer on part two of the statement of strategy and, when the statement is ready, arrange for it to be signed by the chair of trustees and sent to the Pensions Regulator
Covenant assessment will be key to funding approaches, particularly for schemes that are unable to meet the ‘fast-track’ filter. TPR will pay more attention to schemes that follow a bespoke funding method and Trustees will need to ensure that their approach justifiable based upon a robust assessment of covenant. This is likely to mean that more trustee boards will need to commission independent covenant reports focusing on forecasts, reliability of cash flow and likely longevity of the sponsor. TPR has promised further guidance on covenant reviews early in 2023.
The consultation can be found here: TPR Consultation on new DB funding code TPR plans for the new code to be in force from October 2023.