Final scheme funding code of practice for UK DB pensions tackles some of the complexities, says expert

Out-Law News | 12 Jun 2014 | 3:52 pm | 2 min. read

UK companies that operate final salary and other defined benefit (DB) pension schemes will be able to take into account their need to invest in sustainable economic growth when agreeing funding plans with scheme trustees, the Pensions Regulator has confirmed.

The final version of the regulator's new code of practice on scheme funding incorporates its new statutory objective to minimise any adverse impact on the employer's sustainable growth, which takes effect from 14 July. It will come into force "within the next few months", subject to parliamentary approval, the regulator has said. It will be presented to the Northern Ireland assembly separately.

Pensions expert Helen Hanbidge of Pinsent Masons, the law firm behind Out-Law.com, said that the final version of the code contained some welcome amendments to the complex draft, which was published for consultation in December.

"The regulator wants to get the language and tone of its new code right; hopefully these tweaks will help trustees and employers to get to grips with the finer points of its new approach," she said.

"The Pensions Regulator has been moving towards a more principles-based approach for a while now, but the new code of practice contains new elements. There is a change of emphasis in the code of practice away from the statutory valuation requirements, meaning that the focus is more explicitly - and more usefully - on the complex and tricky balancing act involved in DB scheme funding. It highlights the wide range of strategic issues which trustees need to weigh up in practice: governance, integrated risk management, employer covenant and investment strategy considerations, to name but a few," she said.

The changes introduced by the Pensions Regulator as a result of feedback to December's consultation have had the effect of shortening the new code by 20 pages. They include the use of the precise statutory wording of the regulator's new objective throughout the code; changing the emphasis on reasonable affordability away from repaying deficits as quickly as reasonably affordable to considering the appropriate period in which to do so in view of the risks to the scheme and impact on the employer; and more emphasis on proportionality.

Under its new approach, the Pensions Regulator expects trustees to take an "integrated" approach to manage the risks that influence a DB scheme's chances of being able to pay its benefits in full: funding, investment and the 'employer covenant', or the employer's ability to meet its obligations to the scheme. Rather than using discrete triggers such as recovery plan lengths and discount rates to trigger intervention, the regulator will instead allow trustees to manage these three risks together in conjunction with good scheme governance.

The Pensions Regulator currently has five statutory objectives. These focus on the protection of pension scheme members, their benefits and the interests of the Pension Protection Fund (PPF), which compensates members in the event of employer insolvency. Once the new objective comes into force, it will require the regulator to consider the long-term affordability to sponsoring employers of plans to pay back a scheme deficit for the first time.

"The revised DB funding code and strategy set out our expectations of trustees, and how we will balance our current member and PPF protection objectives with our new objective to minimise any adverse impact on the sustainable growth of an employer," said Stephen Soper, the regulator's interim chief executive.

"In the vast majority of circumstances, trustees and employers should be able to agree funding plans that both benefit the business and strengthen the scheme's long-term security - but this can only be achieved by employers and trustees working openly and collaboratively," he said.

Alongside the new code, the regulator published an updated funding policy and regulatory strategy as well as guidance on the code's application for employers and trustees. It said that it would consider issuing additional guidance for charities and non-associated multi-employer schemes in order to address concerns raised by some of the responses to the consultation.