The Pensions Regulator has published a code of practice to help trustees and sponsoring employers of defined benefit (DB) pension schemes to agree funding plans that provide security for retirement savings
Entitled 'funding defined benefits' the code is part of a significant change in the regulator’s approach to DB schemes, together with the new regulatory strategy and funding policy. It recognises that a strong ongoing employer alongside an appropriate funding plan provides the best support for a well-governed scheme.
The code urges trustees and employers to work in a collaborative and transparent way to consider the impact scheme funding proposals may have on the employer’s plans for sustainable business growth.
It also recognises that risk is inherent in pension schemes and expects trustees to identify and manage the key risk areas of investment, funding and employer covenant.
The code, which was subject to several months of extensive consultation, was laid before parliament on 10 June, and, subject to that process, will come into force in the next few months.
Interim chief executive of the Pensions Regulator, Stephen Soper, said: ‘The revised DB funding code and strategy set out our expectations of trustees, and how we will balance our current member and PPF protection objectives with our new objective to minimise any adverse impact on the sustainable growth of an employer.
‘In the vast majority of circumstances, trustees and employers should be able to agree funding plans that both benefit the business and strengthen the scheme’s long term security – but this can only be achieved by employers and trustees working openly and collaboratively.’
The regulator has also today published its third annual funding statement, and associated analysis, which provides market commentary and direction for schemes with valuation dates between 22 September 2013 and 22 September 2014 (known as tranche 9 schemes).
Soper said: ‘While the ability of some employers to close the funding shortfall in their scheme is improving, others are still struggling. We encourage trustees and sponsors to consider the use of the flexibilities within the funding regime, as outlined in the new code, and take a proportionate and integrated approach to managing their risks.’
The new code of practice requires pension advisers to go further in their efforts to advise trustees, increasing the responsibility for risk management, and forcing them to provide in-depth advice and refining their processes and use of technology to provide effective monitoring of the viability and risk factor of schemes.
Marian Elliott, head of trustee advisory services at Spence, a UK pensions actuary and administrator, said: ‘By putting the covenant at the centre of the scheme’s decision making, the Code is essentially crystallising current best practice and encouraging trustees to adopt an integrated approach to risk management. This decision making and planning structure makes complete sense, as the covenant is the main driver of risk in the pension scheme.’
However, there could be compliance issues for smaller pension schemes. ‘There will certainly be challenges in some sectors, however. For trustees of smaller schemes, where budget and time to spend on governance is constrained, the requirement to obtain detailed covenant advice or to carry out asset liability modelling or stress test their strategies may mean they are spending more in this area,’ added Elliott.
The Pensions Regulator DB code of practice is available here http://www.thepensionsregulator.gov.uk/db-pensions.aspx