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The DWP has published its response to consultation on, and final version of, the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 (‘the regulations’).
First outlined by the Pension Schemes Act 2021, finalising the regulations and code has been delayed while the DWP and TPR took into account industry and stakeholder feedback, the evolving economic and funding landscape, and current government policies such as encouraging productive finance, and more flexible use of pension scheme surplus.
DWP says that its regulations are now ‘improved’ – making funding standards and metrics clearer, and addressing concerns including that the earlier draft may have inadvertently driven ‘reckless prudence’. The final regulations aim to ‘work effectively’ for a full range of DB schemes (including open and non-traditional DB schemes), to ‘explicitly anchor the flexibilities described in the draft code’, and to ‘strike the right balance between member security and employer affordability’.
DB trustees will have to establish, review and, where 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 employer agreement.
The regulations define how schemes must give effect to the 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 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 (with assets being ‘highly resilient’ to short-term adverse changes in market conditions).
The revised regulations look to be more ‘accommodating of appropriate risk taking where it is supportable’, and to increase the scope for scheme specific flexibility. To protect against the regime being ‘excessively restrictive’, the regulations have, for example, been clarified to state that schemes can invest a ‘reasonable amount’ in a ‘wide range of assets’ after significant maturity.
To allow the regime to adjust in response to market conditions, concepts such as ‘significant maturity’ will be set out in TPR’s code. The revised regulations make clear that TPR can also set a different date of ‘significant maturity’ for different types of scheme (eg cash balance), and that open schemes can take account of new entrants and future accrual when determining when the scheme will reach significant maturity.
In light of concerns being raised, the regulations have been redrafted to make it clear that they do not affect the power trustees have (after consultation with their employer) to invest in the interests of their members.
The regulations now also make clear that the objective to invest in line with a low dependency investment allocation does not apply to surplus funding. This clarification is intended to allow schemes flexibility into how they can invest surplus, and aligns with the government’s current focus on the use of surpluses.
To facilitate better trustee engagement, and better understanding and accountability between trustees and TPR, schemes will be expected to submit a ‘statement of strategy’. Among other things, this document requires trustees to assess progress against targets, whether their funding and investment strategy is being successfully implemented, and key risks and mitigations.
The statement of strategy now needs to contain a summary of the actuarial valuation; this will enable TPR to remove similar questions from the scheme return to minimise duplication.
The form of the statement of strategy and the submission process will be specified by TPR. TPR will have power to exercise discretion as to the level of detail required (it may ask for less detail, or not ask for an item of information at all) to give a scheme specific approach.
The regulations also contain amendments to the Occupational Pension Schemes (Scheme Funding) Regulations 2005 in relation to the calculation of technical provisions, content of actuarial valuations, and the conditions for determining whether a recovery plan is ‘appropriate’ (the government’s response makes clear that sponsoring employers’ sustainable growth is a matter to consider alongside the key affordability principle).
Finally, the new regime requires DB schemes to appoint a chair (where they do not already have one), as the statement of strategy must be signed off by them. The chair can be an individual trustee, director of a trustee company, or a professional trustee body.
TPR’s forthcoming revised DB Funding code of practice will address further detail and give more practical guidance, as well as TPR’s updated approach to regulating DB funding. It is ‘expected to be laid in parliament in the summer, in order for it to be in force in the autumn’.
TPR will also be reconsidering its ‘Fast Track’ and ‘Bespoke’ approach parameters in light of the consultation responses and the changes in market conditions since their original analysis was undertaken.
Finally, revised covenant guidance is also expected to complete the suite.
The regulations are due to come into force on 6 April 2024, and to apply to valuations with effective dates on and after 22 September 2024 – a gap designed to give the industry time to prepare for the new regime, following some concerns expressed around timing. However, it is worth highlighting that the government itself noted that ‘a significant number of schemes will not have to comply with the new arrangements until 2027’, and that ‘most schemes will not need to make radical changes to their existing arrangements as there is significant flexibility built into the regulations.’
Trustees will be required to agree their first funding and investment strategy within 15 months of the effective date of the first actuarial valuation on or after 22 September 2024. It must then be reviewed, and if applicable revised within 15 months of the effective date of each subsequent valuation, and as soon as reasonably practicable after any material change in the circumstances of the scheme or its employer. The statement 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 that), and submitted to TPR as soon as it has been prepared or revised.
Ensure you understand the new requirements, when they will first apply to your scheme, and how they will impact your current funding approach.
Engage in discussions between trustees and employers to start agreeing the scheme’s strategy, targets and long-term journey.
Employers should commit to keep trustees informed of any issues that may impact covenant or scheme funding.
Look to appoint a chair if one is not in place.
31 January 2024