Is your DB standalone scheme ready to 'fast track'?
Following on from our blog last year on getting ready for a tougher regulator, and in anticipation of the new DB code of funding being published next month, we take a look at how this will affect small schemes and how Citrus will cost effectively support employers through these changes.
New set of standards
A set of standards will be introduced which schemes will need to comply with to ensure they can ‘’fast track’’ and not need intervention from The Pensions Regulator (TPR), otherwise schemes will have to use the “bespoke” approach.
The framework will likely include the following 5 features:
- Long Term Objective (LTO): a single long-term objective for all schemes will be required, regardless of scheme size and covenant. It’s anticipated that the bar will be set at gilts + 0.5% p.a. or gilts + 0.25% p.a.
- Timeframe to LTO: will need to target reaching the LTO by the time your scheme is “significantly mature” which could mean by the time most members are pensioners.
- Technical Provisions (TP): we expect a prescribed discount rate which will vary depending on scheme maturity and strength of employer covenant.
- TP recovery plan: we expect a maximum recovery period, linked to covenant, affordability and possibly scheme maturity. We may also see the end of back-end loading and investment return assumptions above the prescribed discount rate.
- Investment risk: a maximum level of investment risk could be introduced, influencing investment strategy for those going down the fast track.
With 50% of all schemes less than £20m and 80% less than £100m, TPR are likely to use the fast track approach to ensure that these smaller schemes are meeting a set of minimum standards. The fast track approach is likely to mean lower governance costs and the ability to place more focus on a scheme’s ‘end game’.
How can you prepare?
- Benchmark your current approach using a segment identifier tool such as Hymans Robertson’s tool which tells you what segment is most relevant to your scheme, along with the accompanying benchmark analysis report, giving insight into what other schemes do and if your scheme is at risk.
- Test the impact on your scheme and prioritise areas for review, you may be able to make changes to ensure your scheme meets the required standards for the ‘fast track’ approach.
- Consider moving to a master trust like Citrus which could help many schemes to meet TPR’s expectations more effectively. Citrus has a ready-made and effective integrated risk management approach which:
- focuses 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.
Importantly, Citrus can react quickly and cost effectively when there is a need to adapt the framework and all member schemes can benefit from this.
Making use of Citrus’ tried and tested approach can give your scheme a better way to comply with TPR’s greater expectations.
How much spare time have you got to ensure your scheme is compliant?
The growing requirements mean additional time and effort (as well as costs) from employers and trustees to ensure they’re met. Citrus reduces the additional work required from the employer and takes on trustee responsibilities, leaving employers with more time to focus on running their business.
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.