View from TPR: Future of DB Funding Webinar

I attended an interesting and informative webinar from The Pensions Regulator (TPR) last Thursday (13 August) explaining the challenge to regulate the valuations for 6,000 DB pension schemes, even if the resources needed for the other DB aspects, DC schemes, scams etc. are ignored.

All 6,000 DB valuations are effectively currently ‘Bespoke’ under the proposed new headings in the consultation on the new Scheme Funding Code of Practice. For a valuation there are a multitude of assumptions Trustees need to make, each incurring an element of risk, starting with the funding basis used; e.g. the Gilts + basis or the blowing in the wind ++ basis, before considering the interconnectedness of the risks in the funding level, investment, covenant and governance (IRM).

‘Bespoke’ therefore seems an apt description. 

This latest chapter in the story actually begins with the DWP 2018 White paper – ‘Protecting Defined Benefit Schemes’ in which the DWP states:

‘We will:

• Strengthen the Regulator’s ability to enforce Defined Benefit scheme funding standards, through a revised Code, focussing on:
  • how prudence is demonstrated when assessing scheme liabilities;
  • what factors are appropriate when considering recovery plans; and
  • ensuring a long-term view is considered when setting the statutory funding objective (SFO).

• Require the trustees of Defined Benefit pension schemes to appoint a Chair and for that Chair to report to the Regulator in the form of a Chair’s Statement, submitted with the scheme’s triennial valuation.’

In respect of DB scheme funding, the DWP 2018 White paper requires the Regulator to:

• Revise the funding code (CoP3):
  • Including further guidance on how trustees can set their SFO in line with their long-term objective (LTO) and the specific circumstances of their scheme.
• Consult on:
  • Clarified funding standards through a revised Defined Benefit Funding Code of Practice, focusing on how prudence and appropriateness can be defined to better balance employer commitments with risks to members and the PPF.
  • Further help trustees may need in order to make sure they take a long-term perspective when they set their SFO.
  • How trustees can best assess their SFO’s robustness against external risks.
• Undertake more targeted work with schemes identified as being at higher risk.
• Establish clearer funding standards and more effective regulatory enforcement tools to help achieve better decision-making across the Defined Benefit pensions’ landscape.
• Include in the Code a description of how the trustees and sponsoring employers should set their SFO in the context of a LTO.

So, a little like the Data Protection Act 1998 was no longer fit for purpose with the development in technology etc., CoP 3 (the 2014 version being the 3^rd iteration) is struggling. The developments in the pensions market have moved on since PA04, such as the different valuation bases and the understanding of the interconnectedness of the risks.

The SFO is introduced by the DWP as the long-term target, with the Technical Provisions (TP) position and valuations (with any Recovery Plans) just stepping stones to get there. This was illustrated very well by TPR last Thursday, with the proposed choice of the Fast Track valuation (with risks restricted to within certain tolerances) or Bespoke, supported by Section 231 of the current Pensions Bill, which provides TPR with the power to give direction to revise the LTO, should it need to.

The answers my friend …

So, in the revised funding code, TPR needs to set out clarity on prudence and appropriateness to better balance employer commitments with risks to members and the PPF, within a framework of good funding practice, which can all be measured (objective measurement always being easier), in order to report, monitor and update as appropriate, allowing effective regulation within the resources available to TPR.

This begins to provide a basis for clearer funding standards, and although the details and tolerances  of the Fast Track valuation basis have yet to be determined, does seem to indicate that Bob Dylan valuation approaches are likely to be confined to Bespoke, with all of the required justification.

One this one occasion, however, Bob may not be right. The answer my friend (according to DWP and TPR anyway) is not blowing in the wind, it is aimed at the SFO, nailed down, very visible, within tolerance levels, objectively measurable, with all of this then wrapped in governance so tight it squeaks, providing value for money and certified by the Chair in a new DB pension scheme statement (provision for which is in the Pension Schemes Bill, and which no doubt will be in the public domain).

Years of maturity

There is also recognition of DB schemes maturing, with many now closed to new entrants and accrual, combined with the assessment of the employer covenant being less and less predictable the further forward it is projected. In this context the LTO is proposed to ideally reach the low dependency funding position at the time the scheme attains ‘Significant Maturity’. Significant Maturity being proposed as the point at which the average duration of the scheme’s liabilities are 12 years – 14 years, for which most schemes TPR said is about 15 years – 20 years from now. In addition TPR said it would expect schemes to be taking less risk as they mature, so will need to incorporate lower expected returns in the longer term.

The Times they are a Changin’

To deliver the DWP challenge within an effective regulatory framework, the Regulator believes that simplification is required, hence the Fast Track and Bespoke proposals. However, this is not just a challenge for the Regulator, it is a challenge for the industry, where we really have to work together for a better outcome.

If the industry and TPR can work together to agree sensible tolerances for Fast Track (which mean that a large number of schemes can go down that route), then simplification may be achieved. More resources can then go into fighting pension scams and delivering better value for members, rather than just arguing over valuations. The comment from TPR last Thursday was that it is trying to clarify what an effective funding regime looks like, balancing the principles of affordability and member security. Importantly, if the tolerances are too onerous, we retain 6,000 bespoke valuations, for which TPR has already conceded it is struggling to effectively regulate.

Consultation closes on 2^nd Sept but if you email ahead of this deadline confirming you will respond but need a little more time, TPR will give you a few more weeks to submit.