TPR publishes draft DB scheme funding code 

The regulator launched its second consultation on the draft code - which will run for 14 weeks - setting out expectations of schemes to set a long-term funding objective. 

It is hoped the revised DB code will mark a step change in how trustees and employers approach scheme funding.

The DB code, which is set to replace the current code which was introduced in 2014, includes key expectations in relation to trustees achieving low dependency on the employer, setting a plan to reach that point, and assessing the employer’s legal obligation and financial ability to support schemes.

The TPR intends to replace its "one-size fits all" funding standard with a twin-track approach to valuations, under which schemes will be able to choose between a bespoke route or a fast-track option to provide more flexibility.

Executive director of regulatory policy, advice and analysis David Fairs said: "The draft code is clear that all DB schemes should have the necessary long-term funding approach to ensure savers have the best chance of receiving the benefits they expect.

"We want to provide schemes with the continued flexibility around funding to suit their circumstances, while requiring trustees to think carefully about risk management to improve security for their members.

"We have worked hard to ensure the draft code’s principles reflect the 127 responses we received to our first consultation on the code, the clarity we now have on the draft regulations, and our modelling and analysis. The code sets out our expectations in relation to how trustees should comply with legislative requirements."

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Almost 10 million people across the country remain in DB schemes, with around one million of those still actively paying into one, according to the government. Collectively, DB schemes manage a total of approximately £1.7 trillion worth of assets.

Defined-benefit plans in the private sector were once common but involved high risks and costs for employers. Companies now favour defined-contribution plans as they are easier to manage and save a significant amount of money.

In September, the DB sector was hit with a crisis in the wake of former Chancellor Kwasi Kwarteng’s disastrous mini-budget as many DB funds have invested via liability-driven investment (LDI) schemes as gilt yields climbed. 

Tiffany Tsang, Head of DB, LGPS and Investment, PLSA, said: "Overall, we support TPR’s move away from using Fast Track as a benchmark and that TPR has signalled clearly that many Bespoke valuation submissions will not result in detailed scrutiny or engagement. We note that recovery plans based on affordability will be a core focus for the regulator if schemes fall within Fast Track in all other ways.

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“While we support ongoing dialogue between trustees and employers in developing funding and investment strategy, we remain concerned that the draft code shifts the fundamental ways in which strategy negotiations currently operate. The proposals may give disproportionate weight to employers’ preferences, which may not be aligned with trustees’ objectives, particularly in the current economic climate. 

"We agree that the use of LDI should be wrapped into considerations of supportable risks that would naturally be laid out in journey plans; the drafted expectations around when and how to use LDI are reasonable.

“However, further assessment of the proposals is needed before drawing firm conclusions so we will work closely with our membership and TPR in the coming months to determine the on-the-ground impact of the detail that is now provided - on open schemes, for Bespoke approaches, and for multi-employer schemes in particular. The Code will also need to completely fill in the gaps that the draft scheme funding regulations left open for interpretation.”