ACA says new DB funding regime must maintain scheme specific flexibility

ACA says new DB funding regime must maintain scheme specific flexibility

In its response to The Pensions Regulator’s defined benefit funding code of practice consultation, the Association of Consulting Actuaries (ACA) says it is generally supportive of the proposals outlined, but notes that many of the key details are yet to be defined and these details are likely to make the difference between the success, or otherwise, of the new regime.

The Pensions Regulator (TPR) published the first stage of a major consultation on its revised code of practice for defined benefit (DB) funding on 3 March 2020. The consultation considers TPR’s new proposed regulatory approach, the principles TPR thinks should underpin the new framework, and how they could be applied in practice to provide clearer guidelines.

Key points in the ACA’s response to the consultation are:

On Fast Track:

• The ACA supports a simple ‘Fast Track’ compliance approach based on covenant and maturity and, in principle, a ‘fit-for-purpose’ stress test. The precise terms of the Fast Track framework will be important (particularly in view of COVID-19) to ensure the system works appropriately.

• “Covenant visibility” can reasonably inform recovery plan length and prevailing investment risk. But what happens to the covenant beyond the visible period should be based on the balance of likelihoods and not assume low or nil covenant beyond the visible period.

• The ACA notes that there was no mention of allowance for post-valuation experience within the Fast Track framework (or more widely). The flexibility to allow for such experience in setting a recovery plan is a useful tool which should be maintained.

• The ACA would like to see TPR undertake an annual review of ‘Fast Track’ terms and triennial or quinquennial review of the framework.

On Bespoke:

• Maintaining the current scheme specific funding flexibility (where the approach is suitably evidenced) is vital to support employers’ sustainable growth. The ACA needs more detail on how using the flexibility under the ‘Bespoke’ option will be regulated, to provide assurance that the new regime will not be too restrictive.

• It is important for the ‘Fast Track’ approach not to simply be seen as the ‘default’ option and that ‘Bespoke ’offers a genuine and viable alternative for pension schemes.

• The ACA is concerned that there may be too much pressure for ‘Fast Track equivalence’, with the risk that TPR’s s231 powers come into play if TPR considers the divergence from Fast Track too significant. Funding solutions imposed by TPR should be based on a scheme’s circumstances and not defaulted to be in line with ‘Fast Track’.

• Demonstrating good trustee governance, to manage the scheme and react appropriately to significant changes, is important. This isn’t featured in the narrow financial framework but should be within a full IRM evaluation. The ACA hopes to see more on this in TPR’s second consultation later this year.

On the timing of changes in the context of COVID-19

• In view of the impact of COVID-19, the ACA supports setting ‘Fast Track’ parameters towards the more flexible end of ranges suggested in TPR’s consultation. For example, setting a Long-Term Objective at gilts+0.5% rather than gilts+0.25%.

• The ACA encourages TPR to avoid responding to COVID-19 by requiring trustees to obtain legally binding contingencies that cover all the risks that schemes run. The ACA would argue for a more balanced approach which favours employers’ sustainable growth; or in many cases employers’ survival.

• COVID-19 presents an interesting case study in responding to economic stresses. The ACA encourages TPR to use this instance to think through temporary additional flexibilities that could be suitable, either within or alongside its ‘Fast Track’.

Source: ACA says new funding regime must maintain scheme specific flexibility, without tying all schemes to ‘fast track’ by default

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