Hymans Robertson, the leading pensions and financial services consultancy, has called for eight changes to the UK Pension Regulator's (TPR) final Defined Benefit (DB) Funding Code today. The consultancy expressed concerns that the current draft framework may increase regulatory burdens and potentially negatively impact scheme investments and plans.
The firm has highlighted several areas of concern, including the impact on open schemes and potential unintended negative consequences for many pension schemes. The consultancy argues that the best outcome would be for the regulations to remain flexible and coherent with the current scheme-specific funding regime.
Among the changes Hymans Robertson is advocating for includes clear guidance over when the "Fast Track" route to demonstrating compliance may not be appropriate for schemes. The firm warns that while this route may strengthen funding packages for some schemes, it could put pressure on other schemes with stronger long-term plans to "level down" and reduce sponsor support.
The consultancy also advocates for more transitional flexibility for low-dependency investment strategies as a scheme matures. It suggests that TPR should offer a less volatile measure of significant maturity, with duration being a preferred metric.
Hymans Robertson also believes there should be less prescription on asset allocations and hedging levels. It warns that under the current code, schemes could be herded towards similar gilts-based strategies, which could supercharge systemic risks.
Further, Hymans Robertson has suggested changes to the "covenant reliability" period to determine investment risk and maximum affordability. It recommends that TPR should offer practical guidance on assessing employer covenant, allowing for sponsor specifics to be taken into account.
In addition to these recommendations, Hymans Robertson has urged clearer differentiation between open and closed schemes in the code. The requirements for open schemes should be compiled into their own section of the code, it suggests. Furthermore, immature schemes should be exempt from the requirement to set a low-dependency investment target.
Laura McLaren, Partner and Head of DB Actuarial Consulting at Hymans Robertson, commented on the need for these changes. She noted that TPR still has to finalize details that could prove important in how successfully the code works in practice. "Neither DWP nor TPR has yet responded to industry concerns about what it will change to avoid these," she said today.
To illustrate these points further, Hymans Robertson has launched eight case studies examining potential consequences of these reforms for UK DB pension schemes and their sponsors. These studies reflect TPR's latest proposals for the DB funding code, which is expected to come into force for valuations from 1 April 2024.
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