The second consultation into the Pensions Regulator’s new defined benefit funding code will be delayed until “late summer” 2022 – https://t.co/jtheFBLLrZ@TPRgovuk @david_fairs @DWP @agewageuk @henryhtapper #definedbenefit pic.twitter.com/Ekw20g3gnp
— Pensions Expert (@pensions_expert) December 15, 2021
Since the SG Conference on Monday, David Fairs, Director of Policy at the Pensions Regulator , has written a carefully crafted blog that attempts to make a virtue out of the time TPR is taking getting its funding code in place. This blog looks at the consultative process and the interim positions adopted by Fairs and his policy team , asking whether the power of the Regulator is as much in the nudge of consultation as the stick of regulation.
The blog itself takes some time to get to the point which I take to be that while TPR still thinks it can find a consistent measure for risk accross the ever-diminishing number of occupational DB schemes it looks after
…we are conscious that that there needs to be room for schemes to approach risk in a way that is consistent with their individual circumstances. We are considering the best approach for trustees to demonstrate compliance with the legislation and measure and evidence that the risks they are taking in Bespoke are supportable. We are also considering how best to incorporate covenant into both Fast Track and Bespoke to ensure it can be used in the most flexible way to justify risk-taking.
This “consideration” is a time consuming process. the headline of the peice is that the second consultation on the DB funding code won’t start till late summer 2022 which means that the code itself will almost certainly not be implemented till 2023.
Regulator time is not real time
Real time rule making is what happens in emergencies, we see it in the Government’s precriptions over Covid where measure often precede any parliamentary debate and can be brought in within hours of an announcement.
But pensions regulation moves to a different clock. The CDC regulations are still to be published for Royal Mail, we have a wheelbarrow full of consultations from the FCA and TPR which are yet to be replied to. We are still to see any tangible movement on the proposals agreed on resulting from the 2017 auto-enrolment review.
The processs of responding to consultations is time consuming and the return on the investment of time can seem low – if the consultative process is so slow that all momentum seems lost. This is what appears to have happened with the DB funding code.
Why this loss of momentum?
Part of the reason is the lack of resourcs at the DWP which is currently under comsiderable pressure from the failures in payment of the State Pension. Anything between 500 and 700 civil servants are working on rectification, leaving precious little human resource for much else. The rules , codes and guidance laid down by TPR move at the pace of the DWP which is currently funereally slow,
I suspect that the reason for the delays in the DB funding code is also due to the moving ground of sentiment towards investment in the DWP. In the spring of 2022, the DWP will issue draft regulations on funding and investment. These are likely to be a response to the call from the Prime Minister and Chancellor for “an investment big bang” which will focus not on risk reduction but on embracing the challenge of building Britain back better through “productive capital”.
Quite how you invest for growth while taking risk off the table is going to take some consultation!
In the meantime, the PPF’s purple book suggests that the fundamental health of Britain’s DB book has improved so that it is in a slight surplus to the PPF solvency measure. This is in contrast to the state of funding when the Code was first consulted on in 2019. Deficit contributions continue to be paid at a rate of £11bn a year and future valuations may well benefit from changes in the yield curve predicting an up-tick in interest rates. The PPF is not inundated with schemes with failed sponsors, indeed it expects an increasing proportion of schemes in its assessment period to be bought out by insurers on a PPF+ basis.
In short, the second consultation is likely to be about rules drafted in 2022 which are responsive to a more optimistic climate where “growth” is not a dirty word. If my analysis is right, and it comes from speaking with people more expert than me, then the loss of momentum may be the break being applied before a change in direction.
A kinder word on delivery
The “Endgame , MiddleGame, LongGame” conference run on Monday, was not run under Chatham House Rules but nonetheless produced some of the most mature and candid debate on DB pensions, I have witnessed.
It is to the Pension Regulator and that of the FCA (who also featured in the debate) that they were prepared to engage with schemes and their managers and advisers as they did.
I hope that the debate that David Fairs participated either sparked or confirmed his decision to write his blog. The blog then can be seens as an extension of the debate and both as part of the consultation.
My criticsim of the consultaton process and the timeliness of producing guidance and regulations has to be tempered by a recognition that the Pensions Regulator does appear to be listening and does not seem to have dug its feet in.
The long-term resolution to the contrary pressures of a Government looking for pensions to invest in productive capital and a regulator looking to protect members and the PPF, looks set to rest with the largest DB schemes, the insurers and the Superfunds. The master-trust consolidators have an important job to do creating scale from smaller DB schemes, but most will feed into buy-out , releasing employers of further obligations.
In the DB world in 10 yeears time, there look to be only a handful of employers willing to take DB risk with an increasing pressure on open schemes to share risk with members as has happened in Canada and the Netherlands. Most strong schemes will be self-suffecient with the majority of schemes with middling covenants heading for buy-out and those with weak to failed covenants heading for the PPF. That is the Endgame, MiddleGame and LongGame discussed on Monday.
With the market reshaping as it is, the Pensions Regulator may find that it does not need a DB funding code, the market will have organised itself without one. In which case we may have seen consultation as a successful regulatory nudge