The Pensions Regulator (TPR) has published the long-awaited follow-up to its initial – 2020 – consultation on a new code of practice on scheme funding.
It received broad support for the proposed twin-track approach to valuations but concerns were raised in relation to the proposal to benchmark “Bespoke” against Fast Track. Therefore, in the latest consultation, Bespoke will not be assessed by reference to Fast Track. TPR stresses that Fast Track is a regulatory approach that allows TPR to filter schemes for further engagement more easily, rather than a target that all schemes are expected to reach.
The draft code describes how the three fundamental pillars of covenant (the employer’s cash, prospects and contingent asset support) can support risk. It also introduces the concepts of visibility over forecasts, reliability over available cash and covenant longevity, and how these can be built into the trustee assessment of the level of funding and investment risk the employer can support over the journey plan.
In relation to the Pension Scheme Act 2021 requirement for schemes to have a long-term objective to achieve a position of low dependency on their sponsoring employer by the time the schemes reaches significant maturity:
- TPR provides guidance on what a low-dependency investment allocation (LDIA) should look like;
- while growth assets will still be allowable, TPR expects schemes to have a minimum level of interest rate and inflation hedging of at least 90% for the purposes of their LDIA;
- for a scheme of average maturity, it would be reasonable to articulate the LDIA in terms of expected return, broad asset allocation and level of interest rate and inflation hedging. As a scheme approaches its relevant date, TPR expects the level of detail to increase.
- There is more detailed guidance as to how a low-dependency funding basis should be compiled, including the expectation that a yield curve approach will be used.
- “Significant maturity” is quantified, as when the duration of a scheme’s liabilities reaches 12 years.
The new régime is due to come into force on 1 October 2023, for all funding valuations with effective dates after that date.