The UK #pensions sector has undertaken a temperature check on major changes to a funding code, governing DB schemes, proposed by the Regulator.
The result was a cool response to proposals for a new “twin track” approach to scheme valuations.
More to follow:
— Josephine Cumbo (@JosephineCumbo) August 12, 2020
This is how the Society of Pension Consultants Professionals concluded their survey
Our members’ responses show a widespread belief
that the new code will essentially move the funding
regime from one that is scheme specific to one
where any deviation from the Fast Track standard
needs to be explained. Nevertheless, there seems the
expectation that around half of all schemes will go
down a bespoke route, something that if it occurred
would seem to challenge the central premise of the
new Code (that it allows tPR to target its resource
on a small subset of schemes). Key to the decision
whether to go Fast Track or Bespoke seems to be
concerns about the lack of flexibility in the Fast Track
approach and whether or not it will be suitable for
their clients’ schemes.
That said there is a great deal of uncertainty of
how the new funding code will work in practice,
particularly the calibration of the Fast Track
assumptions and how bespoke the Bespoke route
The SPP is a trade body representing 15,000 people whose livelihoods depend on providing services to occupational pension schemes. They depend on a diversity of approaches to scheme funding. Should the Pensions Regulator determine a one size fits all approach to scheme funding, that diversity disappears.
The comments of the SPP membership are to an extent biased against the Pension Regulator’s proposals. The main proposal is to Fast Track the majority of pension schemes away from a dependency on the employer and towards either self-sufficiency or buy-out. As has been noted on this blog many times there are drawbacks to this approach, not least the ruinously expensive cost to sponsoring employers of getting there.
Two fingers up to fast track?
First lets look at the numbers in the survey. The survey starts with a challenge The SPP members see “bespoke” as a myth, less than 10% of members see it as allowing schemes to do as they please , the majority see it as the start of an argument with the emphasis being to “comply or explain”.
What is unclear is the appetite of trustees and sponsors to get into an argument with the Pensions Regulator and to what extent TPR will make the lives of trustees and employers difficult if they do.
The survey goes on to survey the advice that SPP members will be giving trustees.
There is a very low appetite for advising schemes to accept fast track. As mentioned before this is almost certainly biased by the needs of advisers to advise and fast-track requires precious little advice – just a lot of compliance.
The survey looks at the reasons advisers are giving to justify recommending bespoke. We can assume that “self-survival” wasn’t an option.
Unsurprisingly, the short term consideration that Fast Track will jack up scheme funding rates is bottom of the list and longer term considerations about flexibility and suitability head it. But we can be pretty sure that for sponsors, the considerations are the other way round, the cost of funding for self-sufficiency or whatever the long-term objective is, is not pleasant for sponsoring employers in a pandemic driven recession.
Finally we have a degree of consensus (which means balance) about the degree of prescription tPR should adopt. Although this may look anodyne, it isn’t
The SPP are lobbying here for scheme specific consulting with only 7% agreeing with the Regulator that Fast Track should be Fast Track. This really is two fingers up to Fast Track.
With the advisers at odds with the Regulator, sponsoring employers are in for some interesting conversations. As the survey concludes
….our survey shows tPR has a very
fine balance to strike between setting Fast Track
assumptions at a sufficiently prudent level (requiring
only limited regulatory scrutiny) and setting them
such that the significant majority of schemes elect
to go down the Fast Track route.
How influential advisers are in that choice remains to be seen.