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The DWP has published its long-awaited consultation on the draft Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2023 (“the regulations”).
With over 10 million people across the UK in defined benefit (“DB”) schemes, and £1.7 trillion of DB assets under management, the consultation sets out “measures to boost protections” for members of these schemes.
As far back as a 2018 White Paper, the Government proposed strengthening TPR’s ability to enforce DB scheme funding standards to ensure schemes adopt a long-term view when setting their funding objectives. The Pension Schemes Act 2021 finally set out the framework for the new regime, and the regulations now add some of the detail.
TPR’s forthcoming revised DB Funding Code of Practice (“the Code”) will address these requirements, as well as TPR’s updated approach to regulating DB funding. The first stage of its code consultation was published back in March 2020, setting out proposed principles. Since then, there has been a delay while TPR and the DWP responded both to feedback and the evolving economic and funding landscape, and sought further engagement from key stakeholders.
The measures under consultation are designed to contribute to “better and clearer” funding standards, and to “support trustees and employers to plan their scheme funding over the longer-term”, embedding good practice and requiring greater reporting.
The government states that the regulations aim to retain “a flexible, scheme-specific approach. It is neither ‘one size fits all’, nor about micro-managing schemes. Every scheme will be treated on its merits.”
Whilst schemes that are maturing “will be required to manage their risks carefully” as they move towards securing members' benefits, those that are open and well-supported will not be pushed to undertake “inappropriate derisking of their investment approaches.”
The regulations also aim to enable TPR to intervene more efficiently “to protect members when needed”: schemes will submit a statement of strategy (see below) alongside their scheme valuation. TPR will then be able to engage “robustly” with a scheme that appears to be falling short
The consultation runs until 17 October 2022. TPR has confirmed that it will take the draft regulations into account as it shapes its new Code, which it expects to consult on in the autumn.
This new requirement asks DB trustees to establish, review and, if necessary, revise a “funding and investment strategy” that looks to ensure pension and other benefits can be provided over the long term. Schemes should note that determining the strategy requires sponsor agreement.
The regulations define how schemes must give effect to this requirement, looking at the maturity of a scheme (how far a scheme is through its lifetime), asset allocation (at a high level), and employer covenant (which is defined in the regulations), among other things. By the time a scheme reaches “significant maturity”, it should have “low dependency” on the employer in relation to both investment and funding. Schemes that already factor in de-risking with maturity may already be somewhat prepared; those with weak covenants are likely to be looking at more significant changes in strategy. TPR’s revised Code will contain more detailed guidance and specification on how to comply with legislative requirements in setting the strategy.
Schemes will need to ensure their targets and strategy are reassessed regularly in light of economic changes
In terms of timing, the funding and investment strategy will be required alongside a scheme’s actuarial valuation, and reviewed at each cycle (but also as soon as reasonably practicable after any material change in the circumstances of the pension scheme or employer).
Schemes will be expected to submit a “statement of strategy”, signed by the chair, to TPR alongside their valuation: this document requires trustees to assess progress against targets, and whether their funding and investment strategy is being successfully implemented. It must also set out what action the trustees intend to take in the event that risks identified as facing the scheme in implementing their funding and investment strategy materialise.
The statement of strategy must be reviewed as soon as reasonably practicable after any review of the scheme’s funding and investment strategy, whether or not any changes are ultimately made to the funding and investment strategy.
The form of the statement of strategy and the submission process will be specified by TPR.
The regulations also contain draft amendments to the Occupational Pension Schemes (Scheme Funding) Regulations 2005.
Finally, the regulations propose requiring DB schemes to appoint a chair (where they do not already have one). The chair can be an individual trustee, director of a trustee company, or a professional trustee body.
28 July 2022