TPR's DB funding code - which approach is right for your scheme?
Back in March 2020, the Pensions Regulator (TPR) published its long awaited initial consultation on the new DB Funding Code. The introduction of the new code has been on the cards for a while now, and a further consultation response capturing the detail and enforcement will come later this year, with the code expected to come into force at the end of 2021.
With the new code, TPR hopes to be able to target its resources more efficiently and effectively, as well as embedding good practice across pension schemes. To comply with the code, schemes will adopt one of the two routes to compliance – Fast Track or Bespoke.
Although the Fast Track quantitative parameters are still to be formalised, we do have an idea of what this will look like. Schemes will need to have a strategy to get to a formal Long-Term Objective (LTO) which has a ‘low dependency’ ultimate position. The path to getting there will also need to be clear – for example, having a strategy which targets this LTO by the time the scheme is sufficiently mature, and has clear intermediate goals around technical provisions funding, recovery plan shape and length and investment risk. The parameters will be based on some scheme-specific information like maturity and the strength of the sponsor’s covenant. For schemes who meet the criteria for each parameter, there will be minimum regulatory scrutiny.
The alternative to Fast Track will be a Bespoke approach, and this will be for schemes who choose not to or can’t comply with the Fast Track guidelines. This approach has more flexibility to account for circumstances that are specific to the scheme or employer and the submission to the Regulator will need to include supporting evidence to explain how TPR’s principles are met and how any additional risk, relative to Fast Track, is supported. Valuations will receive more regulatory scrutiny but will be equally compliant if done correctly, and this route does not automatically lead to TPR intervention, although it is intended to let TPR intervene quickly using Section 231 where necessary.
In Citrus, we fully anticipate that some of our member schemes will go down the Fast Track route, but others will need additional support in demonstrating a robust strategy consistent with the Bespoke route. We support the principles underlying the code, which aim to get all schemes working towards a sustainable long-term goal. In particular, our current approach already:
- focusses on setting an appropriate long-term objective for member schemes with a clear plan for getting there;
- aligns suitably strong technical provisions with the long-term goal;
- quantifies investment risk, ensuring the covenant can support it; and
- reduces investment risk through use of a capital efficient strategy.
The Citrus approach incorporates an established integrated risk management approach which already lets smaller schemes access advice and analysis in a cost-effective way. Our joined-up investment, actuarial and secretarial services mean that we can also react quickly to industry change and our members benefit from the economies of scale that come with Citrus membership. Our employers see reduced time needed to manage their pension responsibilities, freeing them up to focus on running their businesses.
Find out more about the new set of standards in our previous blog post.
Hymans Robertson has produced a tool to help you quickly identify whether your current strategy is more suited to the ‘Fast Track’ or ‘Bespoke’ route.
For further information on how Citrus can help you meet tougher regulator expectations and improve the journey to your long-term goal, please contact us.