TPR releases its consultation on a new DB funding code of practice

Today, TPR released its consultation on a new DB funding code of practice. We look at what this means for trustees and sponsors of DB pension schemes and highlight the key points.

Key points for trustees and sponsors to note are:

1 Twin track regulatory approach to scheme funding

As expected, TPR is proposing a dual approach to regulating scheme funding: “Fast-track” will be available to schemes that can demonstrate compliance with a range of funding and risk criteria set by TPR, whilst a bespoke approach will apply to those schemes who either cannot meet all of the fast-track criteria or who choose to take additional risks where suitable support can be demonstrated. TPR does not yet know how many schemes may fall into each category.

2 Greater clarity on TPR’s expectations for technical provisions and recovery plans

Technical provisions are to be set “consistent” with (but not equivalent to) the scheme’s long-term objective, and will act as a stepping stone along the way rather than being an end-game of themselves. Consistent with its recent regulatory stance, TPR also wants to curb long recovery plans and wants trustees to keep their focus on ensuring equitable treatment for schemes.

3 The need to evidence how the covenant supports the journey plan

Greater emphasis is placed on demonstrating how the trustees’ assessment of the covenant has been reflected in their scheme’s journey towards a long-term objective (which TPR is looking to prescribe). Although it believes risks exist from lower covenant visibility beyond a rolling three to five year period, TPR expects covenant reliance to remain for 15-20 years for the average scheme.

4 Promoting the use of contingent assets to support scheme risks

Finally, TPR acknowledges that there may be some schemes who wish to take more risk than TPR believes would normally be tolerable. In such circumstances, TPR is promoting the use of contingent assets if trustees can evidence how they would provide support in the event of crystallisation of risks in the scheme.

Michael Bushnell, Managing Director, Lincoln Pensions, comments on the code from a trustee perspective: “It’s long and complex, but the main thrust of TPR’s consultation couldn’t be clearer: trustees, sponsors and advisors need to do more to plan a journey for their scheme where the risks can be supported by the covenant, and evidence that plan.

“Given the likely length of a scheme’s covenant reliance, and new stress tests to understand how this reliance can be supported, understanding the evolution of the sponsor’s risk capacity over time (not just in the near-term) will remain key.”

Alex Hutton-Mills, Managing Director, Lincoln Pensions, comments on the sponsor perspective: “Although sponsors and their investors may initially be alarmed by TPR’s proposals, they shouldn’t be overly surprised given the regulatory mood music in the last few years.

“Sustainability remains a guiding principle in the consultation. Accordingly, sponsors and investors should focus their attention on how they engage with trustees to evidence the covenant strength and affordability; scrutinise investment proposals to ensure an appropriate allocation of risk; and explore what non-cash options may be available for schemes to support a more efficient allocation of capital.”

The consultation on the new DB funding code is available on TPR’s website.

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