20 December 2022 Pensions

UK Pensions – More detail on the new pension scheme funding regime

The Pensions Regulator has published a package of documents on defined benefit (DB) pension scheme funding, including a draft code of practice, a consultation on the draft code, a consultation on the Regulator’s proposed regulatory approach, and a response to the first scheme funding consultation. The documents are based on the draft regulations consulted on by the Government earlier this year: see our client alert for more information.

The publication of this package of documents by the Regulator will help employers and trustees understand in more detail the likely impact of the new regime on the future funding of their scheme, although some uncertainty will remain until the regulations and code are finalised next year. 

What is covered by the draft code?

The draft code sets out the Regulator’s expectations in relation to some of the key concepts in the draft regulations, including:

  • the low dependency funding basis;
  • the low dependency investment allocation;
  • significant maturity and the date on which a scheme is expected to reach significant maturity;
  • assessing the strength of the employer covenant;
  • journey planning; 
  • the statement of strategy; and
  • how these elements of long-term planning fit with other aspects of scheme valuations.

There is a lot of detail in the draft code which will require further analysis in the weeks to come, but for now the key point to note is that schemes will be required to have a long-term objective of full funding on a low dependency funding basis, propelling trustees and employers further (and more quickly) towards fully funding their schemes on a buy-out or self-sufficiency basis.

What is the twin track regulatory approach?

The concept of a “fast track” regulatory approach does not feature in the draft regulations, but was proposed by the Regulator in its original March 2020 consultation on scheme funding. The aim of this approach is to help the Regulator filter out schemes that require minimal engagement, and identify and intervene where there are concerns that schemes are not complying with the legislative requirements.

It is proposed that trustees following the fast track approach will be asked to evidence how their scheme meets three criteria relating to technical provisions, an investment stress test and a prescribed recovery period. If a valuation meets the fast track parameters, the Regulator says it is unlikely to scrutinise the valuation further and it is less likely to engage with trustees. The Regulator estimates that around half of schemes would have met the fast track criteria as at March 2021.

The alternative to fast track is a bespoke approach, which the Regulator regards as equally valid. A bespoke approach may be more appropriate for schemes following a more complex funding and investment path or where they are unable to meet the fast track criteria. The intention is that the bespoke approach will give trustees the flexibility to select scheme specific funding solutions, but they will still need to meet the legislative requirements and the key principles set out in the code.

Next steps

Both consultations will close on 24 March 2023. We are currently expecting that the final regulations and code will come into force in October 2023 and will apply to valuations with effective dates on or after this date.

For more information, please speak to your usual Linklaters contact.