A DB funding code – but not as we knew it

Speaking at Professional Pensions’ Trustee Senate last week, David Fairs said the regulator’s second consultation on the new code was dependent on the Department for Work and Pensions issuing its own regulations – something he said that was on track for “late spring”.

He said this would enable the regulator to issue its own second consultation on the code in “late summer”.

This gnomic timetable makes the DB funding code just about  the longest work in progress in pension history.

It started life at a time when we were considering the potential impact of Brexit, continued through the separation from the EU, crossed the pandemic and is now being recast as the threat of stagflation drives down the notional cost of liabilities to a point where the pension schemes that tPR feared for, now appear in good health. Of course along the way, these schemes have been sucking out the resource needed to Build Britain Back Better as they demand money with menaces from sponsors, to enable to run their pensions with little or no “market risk”.

But Fairs added the regulator’s thinking with regards to the DB funding code had “evolved a lot” – noting TPR was currently working through how it was going to communicate this evolution to the industry.

He said: “We are going to be engaging with industry, with advisors and with trade bodies to explain how our thinking has developed and why we’re now thinking what we do.”

TPR has certainly a lot of explaining to do.

1. It needs to explain to the DWP how the aims of the original version of the funding code would allow DB schemes to invest in the economic recovery following the events of the past  five years. Locking pensions down into a standardised pathway that readies schemes for buy-out or self-sufficiency looks like a harmful cocktail of unenterprising measures that have assured the continuing under-performance of sp0onsoring employers against a benchmark of listed global competitors.
2. It needs to explain how pension schemes trustees are supposed to allocate more money to private markets – with patient capital – when being urged by TPR to retreat into defensive assets , suitable to be taken on by insurers or to hedge out any covenant risk from a sponsor failing.
3. It needs to explain just what is the threat to the PPF that the DB funding code is concerned about, the PPF is in rude health, the PPF assesses DB schemes as in aggregate 111% funded and the schemes that are best funded are those who have taken advantage of maintaining a reasonable exposure to growth assets. The steep decline in bond prices over the past six months may have reflected lower liabilities, but it has meant that schemes with high exposure to real assets (equities, infrastructure etc.) are now well outside the relegation zone.

I was present (and indeed chairing) the First Actuarial Conference at which David Fairs confidently announced the code (the video of his speech is still available on the link above)

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What has been lost?

TPR’s obsession with managing the supposed risks resulting from a low interest rate, low inflation economy has not just cost DB sponsoring employers the chance to invest productively in their future (thus creating good well-paid jobs), it has lost those working for those companies , proper funding of DC pensions. The gap between DB and DC funding rates from sponsors has created an inter-generational unfairness between those who  have DB pension promise  and  those who have-nothing but a pension pot.

We are losing a generation of “savers” who are saving into a black hole of “freedom” with little chance of getting paid a pension, unless they lock into an annuity which still look pretty poor long-term value. The tortuous process of launching a CDC code looks like delivering little opportunity for CDC pensions to those in DC schemes for at least five years. The DWP has not adopted the FCA’s investment pathways, those retiring out of DC workplace pensions are doing so into shark infested waters.

What has been lost is all sense of proportion.

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We welcome any change of direction on the DB funding code…

Consultants and trustees and trade bodies will no doubt start their responses to the yet to be published second consultation on the yet to be published  revised DB funding code with some encomium to the Pensions Regulator on its flexibility to respond to changing economic circumstances.

But I am reminded of the numerous blogs on here from Con Keating, Dennis Leach, Mike Otsuka, Michael Bromwich, Iain Clacher, the RPMI and the comments of many “maverick” actuaries such as Hilary Salt and  Derek Benstead. They all subscribe to a degree to the idea of an open pension scheme with an underlying contractual accrual rate which governs funding at a much deeper level than financial economics will allow for.

For them, the vision of a continuous blue line  has been destroyed by the onerous obligations of regulations that required schemes to guarantee pensions that could not be afforded and which tipped sponsors into withdrawing their support for future accrual.

The battle over section 123 of the Pension Schemes Bill was fought over this issue., the Lords arguing that schemes like the Railways Pension Scheme should be allowed to remain open and funded on an ongoing basis rather than be subject to the original version of the DB funding code’s prescriptions.

Instead of  maintaining consensus around an underlying contribution rate (Con Keating and Iain Clacher’s CAR), the regulator has promoted statements of funding principles based on the top-heavy deployment of covenant reviews, professional trustees, LDI, member de-risking exercises and longevity swaps at huge expense , not least to expsoure to the good news story from the markets over the past fifteen years.

Let us hope that when the Pension Regulator finally produces its revised DB funding code for further consultation, it will acknowledge that the people who stood firm behind their defined ambitions are properly vindicated.

I fear however , that the new funding code, far from showing contrition, will be another triumphalist re-write of history as intimated in these paragraphs of Professional Pensions report.

Fairs said last week’s annual funding statement signalled the regulator would start this process with the revision of is covenant guidance, noting that it would begin engaging with covenant advisers on this over the coming month with a view to publishing something on covenants in the early summer.

He said this work on covenants was “one of the building blocks” of how its thinking had developed – noting some of the changes it is making in this area would become fully understood as the regulator revealed more on the new DB funding code in due course.