Pensions - Articles - TPR reply to consultation risks being worst of both worlds

Following the closure of its first consultation on a new funding code for Defined Benefit pension schemes, the Pensions Regulator (TPR) has indicated that it will issue more detailed proposals and a draft code for consultation in Spring 2021. But Jon Forsyth, partner at LCP, has warned in a new blog that the signs coming from TPR suggest that the revised proposals could in some ways represent the ‘worst of both worlds’, being too weak for schemes that could achieve more, but too inflexible for schemes which need a genuinely ‘Bespoke’ approach.

 Under its draft funding code proposals, published in March 2020, TPR envisaged a ‘twin track’ approach to setting the rules around DB scheme funding. TPR proposed that a majority of schemes would be assessed using a ‘Fast Track’ process, based around standardised assumptions on things like discount rates, recovery plan lengths etc. It would also allow a ‘Bespoke’ approach for schemes which felt that the ‘Fast Track’ approach was not right in their specific situation. Crucially, however, the ‘Bespoke’ approach would still be benchmarked against the ‘Fast Track’ parameters.

 The draft funding code consultation was largely prepared before the full impact of the Covid-19 pandemic was apparent. TPR maintains that its broad approach is still appropriate, but it has hinted (for example in recent blogs and interviews) that it might relax some of the Fast Track parameters when it comes up with its final proposals. However, as Jon Forsyth points out in his blog, for some schemes this might hamper what trustees are able to negotiate with employers, and this would not necessarily be in the interests of members.

 At the same time, TPR has stood firm in saying that schemes wanting to go down the ‘Bespoke’ approach will be assessed relative to the ‘Fast Track’ position. Jon Forsyth argues that in these cases, the new regime could be too inflexible, even if the Fast Track benchmark had been weakened. This is because many schemes wishing to use the Bespoke approach would, by definition, have special features which mean that a one-size-fits-all ‘Fast Track’ approach would not be an appropriate benchmark to use.

 In other words, there is a risk we could end up with a worst of both worlds when it comes to a new funding regime for DB pension schemes, where the regime is both too inflexible and too weak.

 Commenting, Jon Forsyth said: “The framework for Fast Track valuations potentially matters hugely to all schemes, and not just those planning to use the Fast Track approach. TPR proposes that schemes planning to use a Bespoke approach are still benchmarked against the Fast Track rules, and these may simply not be a good fit for particular schemes such as schemes that are open to new members, charities, those with a particular need to carefully balance the need of other stakeholders in the business, or potentially larger or more complex schemes. Simply weakening the Fast Track rules does not solve this structural problem but could have the negative effect of making life more difficult for some sets of trustees. There is a real risk that we end up with the worst of both worlds if one set of parameters is used for two quite different purposes and does neither job well. In my view a more flexible regime where Bespoke really means Bespoke, but with an appropriately prudent ‘Fast Track’ measure for those schemes wanting to use it, would seem a better approach”.

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