The underpinning principle of our revised DB Funding Code is that schemes should have the necessary long-term funding approach to ensure savers have the best chance of receiving the benefits they expect.
It’s what we said when we launched the first stage of our consultation in March last year, and we stick by the same goal today.
We also said that the launch of the revised Code was a significant moment for DB schemes, and that’s why – as we approach our second consultation – it is vital we take the time to get it right.
It’s also important that we recognise the economic backdrop to our second consultation and the balance between security for members and affordability for employers.
Working with DWP, we are developing and progressing a package of DB funding measures that puts savers at the heart of what we do. Our aim is to provide schemes with the continued flexibility around funding to suit their particular circumstances, while seeking to improve security for pension savers. We are committed to engaging with industry in a meaningful way.
We remain confident the Code will build the foundation for more robust long-term funding of DB schemes and will embed the good practice that already exists in the market.
It is critical however that the draft Code and DWP’s draft regulations work together in a coherent and integrated way. We have been working closely with colleagues at DWP to achieve this and agree a timetable that works for DWP, us and industry.
We want to take the opportunity to learn from DWP’s consultation on the draft funding and investment regulations, which we expect to be published in Spring 2022. And we want to ensure that stakeholders have ample opportunity to engage with and input into our proposals as they are developing.
Our second consultation on the draft Code will not therefore follow immediately after DWP’s consultation on the draft regulations, but will be launched in the late Summer of 2022.
As we’ve emphasised previously, it’s important to note that the existing Code and funding regime remain in place until such time as the new legislative requirements and the new code come into effect.
When introduced, the changes will be forward-looking, meaning that schemes with valuation effective dates on or after the code’s commencement date will be affected. I hope this means there is no uncertainty around our expectations for DB schemes in the meantime – it is very much business as usual, in line with what our Annual Funding Statement sets out on valuations already in progress.
Shaping the Code
I am often asked how the Code will eventually be shaped, and what schemes can expect. We are clear that the principles established through our first consultation remain the right ones and they had the support of many respondents. For the second consultation, we will publish a draft of the Code for feedback. As mentioned, it’s important we let the second consultation do its job and then consider the comments we receive in line with the development of the DWP draft regulations.
One area that generated a lot of interest during our first consultation was how the Bespoke route would work in practice and how risk would be measured and justified. In particular, there were some concerns around loss of scheme-specific flexibility. We are clear that Bespoke will very much be a scheme-specific funding solution, with the extent of the flexibilities within it defined by the constraints of the legislation.
However, one of the new requirements in the Pension Schemes Act 2021 is that trustees will have to explain how they intend to manage and support the risks their scheme is taking along the journey to their long-term objective. We need a consistent way of measuring risk across all schemes, a common language, and in our consultation, we proposed to measure risk in Bespoke funding plans against Fast Track, noting Fast Track already incorporates some risk based on covenant and maturity.
We continue to believe that this is important, but we are conscious that there needs to be room for schemes to approach risk in a way that is consistent with their individual circumstances. We are considering the best approach for trustees to demonstrate compliance with the legislation and measure and evidence that the risks they are taking in Bespoke are supportable. We are also considering how best to incorporate covenant into both Fast Track and Bespoke to ensure it can be used in the most flexible way to justify risk-taking.
We look forward to engaging once more with our regulated community later in 2022 as we work together to develop and consult on a DB funding code that works for all and put savers at the heart of all we do.
By David Fairs, Executive Director of Regulatory Policy, Analysis and Advice