Exactly a year ago, I blogged that the underpinning principle of our revised defined benefit (DB) Funding Code was that schemes should have the necessary long-term funding approach to ensure savers have the best chance of receiving the benefits they expect.
The need for long term funding is also a key government objective and underpins the regulations published by DWP. These have given us the clarity we need to publish our second consultation on the draft DB Funding Code, which explains how we will interpret the legislation and will help trustees meet the rules set out by government.
I’m delighted to say that we will publish the 14-week consultation before Christmas. I urge trustees and their advisers to read it and respond.
The draft code we consult on will be based on DWP’s draft regulations. It is not usual for us to consult on a draft code before government regulations have been finalised, but we hope this will be helpful for industry to see how we have interpreted the draft regulations and to see holistically how the different elements of the package (legislation and code) will work together in reality.
We acknowledged that the launch of the first consultation in March 2020 was a significant moment for DB schemes, and so it was vital we took the necessary time to get it right before launched our second consultation.
Of course, a lot has happened since March 2020. We have developed our thinking on the detail and application of the principles to reflect the 127 responses we received to our first consultation on the Code, our modelling and analysis and, as I have mentioned, the clarity we received this year from the DWP’s draft regulations.
We have also taken on board recent events and the current economic backdrop, and the balance between security for members and affordability for employers. We still believe the direction of travel from DWP regulations and our Code remains the right one. Long-term planning and risk management remain key tenants of good scheme management across all market conditions.
We are launching the consultation before Christmas so that the Code can be laid in the summer next year. This is crucial if the Code can commence in October 2023.
Putting savers first
Working with DWP, we have developed a package of DB funding measures that puts savers at the heart of what we do. We want to provide schemes with the continued flexibility around funding to suit their circumstances, while requiring trustees to think carefully about risk management in order to improve security for pension savers. We will engage closely with the DWP and industry as we finalise the code after consultation.
We are not looking to fundamentally change the shape of the existing pensions landscape but embed good practices – many of which already exist – to ensure all schemes adopt the right funding approach in the decades ahead.
Trustees of schemes will be expected to reduce reliance on their sponsoring employer as their scheme becomes mature, improve risk management and raise the bar for evidencing supportable risk taking.
Along with the draft Code, we will also publish a separate consultation document on Fast Track and our twin track regulatory approach.
Fast Track is not a legislative tool so is not included in the draft code. However, it will remain a key part of the funding regime. Fast Track is one possible valuation approach providing a simplified path to demonstrating compliance. Fast Track will act as a filter for our assessment of actuarial valuations that are submitted to us. If a valuation submission meets the series of Fast Track parameters, we are unlikely to scrutinise it further or engage with trustees.
Schemes will be free to follow the bespoke route, which gives trustees the flexibility to select scheme specific funding solutions if the funding approach and actuarial valuation meet legislative requirements and key principles set out in the code. Bespoke is an equally valid approach and may be more appropriate for schemes following a more complex funding and investment path but also those unable to meet the fast track criteria.
The latter system is similar to the current arrangements for all schemes submitting valuations.
Under the new regulatory framework, we will focus our resources where they can be most effective. We will be able to filter out schemes requiring minimal engagement and intervene when we identify schemes that potentially have too much risk.
Our new Code will be forward looking, so only valuations carried out under the revised legislation will be affected.
A key part of the new Code concerns scheme valuations. Trustees currently working on a valuation will be judged against the existing legislation and Code.
We have spent a lot of time drafting our new DB Funding Code and approach to Fast Track and I’m looking forward to the industry’s response as we look to support trustees and protect savers in the decades ahead.
By David Fairs, Executive Director of Regulatory Policy, Analysis and Advice