After two years of industry consultation, the Pensions Regulator’s Defined Benefit (DB) Funding Code of Practice was laid in Parliament at the end of July. The Code gives practical guidance for trustees on how to comply with all DB scheme funding requirements.

Chris Heritage, Director, and Andrew Stewart, Head of Client Team, share reflections on the new Code.

It is helpful that the Code has been laid quickly following the creation of the new Government, and crucially before Parliament’s Summer recess, helping to avoid a lengthy period of uncertainty, with Regulations in force but no Funding Code. This is especially the case for those schemes with 30 September or 31 December valuation dates.

We are pleased that TPR has listened to consultation response feedback, including our own, updating the Funding Code to reflect a number of comments. Key updates include:

1. The use of a more principles-based approach, with increased flexibility afforded to schemes compared with previous drafts of the Code. This includes the removal of the more formulaic approach previously set out for determining the maximum level of affordable risk. This should ensure that there are fewer cases of schemes feeling bound by a prescriptive approach that may not necessarily lead to the best outcomes for members. As drafted, schemes should have more flexibility to do what’s right for their specific situation, within the boundaries of the Funding Code principles, provided that approach is based on reasonable considerations and appropriately documented.
2. Listening to our concerns that the Regulations and draft Funding Code predominantly focused on a journey to low dependency, by now making clear that “even schemes that are fully funded on a low dependency funding basis at and after the relevant date remain exposed to covenant risk”.
3. Clarity that significant maturity will be reached when duration is 10 years, with fixed market conditions underpinning the calculation to remove the risk of market fluctuations impacting the timeframe to reach this. This immediately provides an opportunity for all schemes to quickly ascertain broadly how long their next recovery plan may be.
4. Additional flexibility around investments, with a broader definition of the Low Dependency Investment Allocation, clarity that it is a notional target rather than an actual investment restriction and a move to a principles-based assessment of the “highly resilient” requirement.

While the Code is now laid in Parliament, there is plenty of detail still to come – which highlights the extent of the administrative burden on schemes going forward. The industry is still expecting a proposed consultation on updated covenant guidance and also, following the consultation in March this year, guidance on the Statement of Strategy.

With the Regulator having introduced concepts such as Covenant Reliability and Covenant Longevity within the Funding Code, we look forward to the covenant guidance which should provide additional detail on how these important regulatory concepts should be applied in practice.

However, before we have this additional detail, pension scheme trustees and employers should start digesting the new details within the new Funding Code and putting in plans to be “Code-ready” leading up to valuations with effective dates over the coming 12 to 18 months. We will be publishing a more detailed breakdown of key Funding Code requirements in due course to aid with this preparation.