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The new DB pensions funding code: ‘comply or explain’

The new DB pensions funding Code: ‘comply or explain’

Can TPR satisfy Goldilocks and get the balance ‘just right’?

Mike Smedley

Partner, Pensions

KPMG in the UK


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The Pensions Regulator (TPR) promised in 2018 to become clearer, quicker, tougher and has been living up to its new mantra.

DWP’s white paper last June set out its stall on the cover page ‘Protecting Defined Benefit Pension Schemes – A Stronger Pensions Regulator’. So we shouldn’t be surprised by the emboldened Regulator’s approach. A key plank in the upgrade to Regulator 2.0 is an updated Defined Benefits Funding Code of Practice. While not in itself legally binding (yet), it provides the bedrock for the Regulator’s DB funding activities.

So what will this new Code of Practice say? Privately and publicly TPR has started to discuss a ‘comply or explain’ regime. Either your actuarial valuation meets a published minimum standard or the Trustees will have to explain themselves! This marks a major shift from today where the onus is on TPR to demonstrate a breach of legislation.

For a minimum standard to work, the model will have to be well-defined with limited scheme-specific flexibility. It’s also clear that TPR is not just concerned about Technical Provisions . The ‘comply’ framework will encompass the long-term target, contributions and investment risk. TPR is realistic though. It expects a significant minority of schemes to go down the ‘explain’ route and seems open-minded provided the explanation passes muster. Either way we can expect the general outcome to be less risk, higher company contributions (where possible), and more formal downside protections for schemes.

To add to the likely complaints from employers, TPR faces a number of technical challenges. Where should they set the bar for the ‘comply’ framework? Too low and it won’t improve outcomes for schemes; too high and it will be unaffordable – and TPR will drown in the deluge of explain letters. That goldilocks 'just right' point might be hard to pin down. They also have to grapple with defining investment risk and covenant metrics – two concepts that don’t lend themselves to a standardised set of numbers.

But perhaps their most significant challenge has nothing to do with pensions. The timetable envisages a new Code during 2019 followed by primary legislation. But parliament isn’t exactly twiddling their thumbs and is there a risk that political appetites change? Maybe that’s why TPR is ploughing on with the Code regardless of any new legislation.

KPMG are currently supporting a number of clients with their interactions with TPR and helping them get on the front foot as the DB funding landscape changes.

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