The Pensions Regulator (TPR) has confirmed that the Defined Benefit (DB) Funding Regulations will be introduced in the new year, with the new DB Funding Code (the Funding Code) to be published in due course ahead of its planned implementation in April 2024. It is anticipated that the regulations will be in force by April 2024 and will be effective for schemes for valuations from the autumn.
As explored in our previous article, the idea of a new DB funding regime was first introduced through the Pension Schemes Act 2021 and is expected to be the biggest change in DB funding and investment strategies in nearly 20 years. Trustees and sponsoring employers of all DB schemes will be required to take action in order to de-risk and allocate investments, with the ultimate goal of reaching low-dependency funding. In particular, the Funding Code will place emphasis on employer covenant and there will be a requirement to further scrutinise the financial strength of the employer, and the support it can provide for its pension scheme, in more detail.
TPR has also confirmed that, following the Chancellor’s proposed Mansion House reforms (as presented in July of this year), it has revised the Funding Code to ensure consistency with the goals of the reforms; namely, the Funding Code will allow for increased flexibility for pension schemes to invest in diverse assets, or otherwise introduce an increased amount of risk in their investment strategies, if appropriate. As such, we may start to see schemes which are immature, or which are open to new members and future accrual, or which otherwise are deemed to be backed by a strong employer covenant under the Funding Code, start to invest more in growth assets. However, TPR has also emphasised that the key focus for trustees will be to balance these investment decisions with realistic long-term planning, the objective being to put the scheme in the best possible position.
Overall, the confirmation that the Funding Code will be delivered in time likely serves as welcome news to the pensions industry. Whilst for some trustees the new Funding Code may significantly change how they assess employer covenant and analyse risk, the Code will provide clarity and guidance as to how to manage their DB schemes going forward.
For more information on the contents of this new regime, please also see our flyer here, which explains how it could lead to an increase in pension costs for sponsoring employers.
