When the Funding Code was introduced 12 months ago it was considered one of the most significant changes for pension schemes since 2005. The first schemes are now completing valuations under the Code and there has been the opportunity to review its effects.
Emma Moore, associate partner at Aon, said: “Most UK pension schemes are simply much better funded these days compared to 2018, when the idea of the Funding Code was first raised. That can’t help but make you feel that the key reasons which drove the introduction of the Code are now much less relevant - but the baseline for funding standards has been raised both prior to and since its introduction last year. Over the last 12 months we’ve seen schemes’ experience broadly following the ‘80/20 rule’, with the large majority of schemes continuing their existing practices and showing that they are compliant with the Code. However, there is a minority for whom the new regime has meant more significant change. In particular, more poorly funded schemes are having to reconsider whether additional security is available to strengthen their position. Where this isn’t viable, there are some schemes where the addition of the Funding Code has done little to improve the situation.”
Covenant concerns in the spotlight
One key area where changes have been evident is around covenant. Schemes that are more reliant on funding from their sponsor have needed to gather more information to demonstrate the strength of their covenant and the way in which it supports scheme risks.
Alex Beecraft, partner at Aon, said: “The new Funding Code and covenant guidance have brought the expected challenges for schemes, particularly where parent company guarantees are significant or covenant information is limited. The first-time adoption issues facing every scheme are different, but there is flexibility in the new regime and many stakeholders have been willing to be pragmatic when addressing them. The positive side of the new requirements is that they go further in requiring the integration of covenant with investment and actuarial aspects. As a growing number of flexibilities become available to deliver better outcomes for all stakeholders, explicitly recognising how covenant is the foundation of pensions strategy is central to capitalising on them.”
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