Consultation Response #2: How good is good enough?

This is the question that TPR will have to tackle as it looks to refine, define, and ultimately implement the Fast Track of its twin-track regulatory approach. The recent consultation on the new code of funding has made it plain that the objective for Fast Track needs to be clearly stated, before its components can be determined. Should Fast Track represent the ‘gold standard’, a ‘good enough’ baseline approach for DB pension schemes, or something in-between.

If the Regulator’s combined heads aren’t already dizzy with consultation responses, the potential influx of bespoke requests if Fast Track is set very prudently will surely get them spinning. The limits on regulatory capacity to effectively review valuation submissions mean a ‘gold standard’ approach is unlikely to be feasible. A compromise needs to be struck.

This might persuade one to nudge Fast Track more towards the ‘good enough’ end of the scale – to free up regulatory resources, acknowledging that the aim is not to develop a risk-free framework. But then there is a risk that stronger sponsors in a position to address their DB pension issues, delay action by hiding behind regulatory minimum compliance. Opening the Fast Track floodgates may leave members bearing the brunt of unnecessary risk.

Defining Fast Track at anything but the most prudent ‘gold standard’ will also necessarily mean that a single set of criteria cannot be applied to all covenant strengths – what is only just ‘good enough’ for a strong covenant is unlikely to be appropriate for a weak or stressed covenant. A covenant-agnostic Fast Track exacerbates the calibration challenges, whereas a Fast Track underpinned by covenant allows the parameters to reflect covenant risk.

A final morsel for TPR to chew over is that it could make sense for Fast Track parameters to vary over time, reflecting the macroeconomic cycle (including shocks such as COVID-19) and regulatory standards / capacity.

The second consultation, which is expected to define Fast Track parameters, at least as a starting point, could coincide with a time of weaker economic activity – but whether this means TPR will set the bar lower or higher is anyone’s guess.

Emily Goodridge, Director

Back to Insights