Current Issues – March 2024         

New Funding Regulations:  The Government has released its response to the consultation on the upcoming funding regime for DB scheme, alongside the draft Occupational Pension Schemes (Funding and Investment Strategy) Regulations 2024. This new framework aims to strike a balance between safeguarding members’ benefits and ensuring the sustainability of sponsoring employers. It encourages long-term planning and cooperation between trustees and employers. The regulations will require trustees to consider the sponsors cash flow, performance, resilience, and the time-period over which the trustees believe they will be able to rely upon employer support. The regulations will also make trustees consider the concept of “significant maturity, with more mature schemes expected to adopt more prudent funding and investment strategy. Trustees will be required to prepare a ‘Statement of Strategy’ to evaluate funding and investment strategies, with regular reviews mandated. The Funding Regulations await parliamentary approval, pending the release of updated guidance from TPR. Expected to take effect in April 2024, the regulations will apply to valuations from September 22, 2024.

Scheme surplus – Government considers statutory override:  The government’s latest consultation on defined benefit pension schemes includes a proposal for a statutory override on scheme rules regarding surplus distribution. Responding to feedback indicating scheme rules as a primary barrier to surplus access, the Department for Work and Pensions (DWP) is contemplating a statutory override to ensure all schemes have the option to share surplus, provided they maintain prudent funding levels. The government emphasizes that any surplus extraction must leave the scheme over 100% funded on a prudent basis. Various methods for defining residual funding levels are proposed, including a fixed margin approach, variable margin based on investment risk, covenant requirements, and a buyout funding level threshold with a statutory override. The consultation will close on April 19th.

PPF proposals for acting as a public sector consolidator:   The PPF has unveiled its initial concepts for structuring a public sector consolidator (PSC). The PPFs initial considerations are aimed to align with the government’s objectives: catering to schemes unattractive to commercial providers, safeguarding the interests of transferring scheme members, boosting investments in high-growth UK assets, and mitigating market distortions. The PPF has argued for the PSC’s legal autonomy, prohibiting cross-subsidy or fund pooling with other PPF-operated funds. It proposes a non-sectionalised operational model to optimize efficiency and scale. Emphasizing a long-term growth strategy, the PSC aims for ongoing management rather than acting as a buyout intermediary.

The PPF suggests that the PSC would accommodate schemes with deficits, subject to employers committing to a scheduled deficit closure plan. In cases of employer insolvency, member benefits would be adjusted, capped at PPF compensation levels. The PPF anticipates the PSC’s appeal to smaller schemes, particularly those with fewer than 100 members, traditionally unattractive to commercial providers.

General Levy – Welcome news for small schemes:   Last year, the DWP consulted on increases to the General Levy, which covers the running costs of TPR, the Pensions Ombudsman and elements of the Money and Pensions Services.  It’s preferred option at the time was for a 4% p.a. increase with an additional premium of £10,000 a year for schemes with fewer than 10,000 members.  Quite rightly, small schemes were horrified by this proposal and Atkin responded to this consultation in robust terms.  The DWP has now dropped the idea of the additional levy for small schemes and will instead increase each element of the levy by 6.5% for the next three years.

TPR – Annual report on DB schemes:   The Pension Regulator (TPR) has unveiled its latest annual report on the UK’s occupational (DB) and hybrid pension landscape. The report indicates an improvement in scheme funding levels since 2022, with a notable increase in schemes achieving 100% or higher funding levels. The total deficit of schemes in deficit has decreased by more than half. The DB landscape continues to contract, with a 2% reduction in the total number of schemes since 2022, from 5,378 to 5,297. Access the full report, here.