Not a U-turn , but a change of direction
The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2023 look like arriving some time in 2023 after another round of consultation. They appear to be taking schemes on a different course to what tPR had been suggesting in its draft DB funding code. Much has changed since 2019 when its original DB funding Cod of Practice emerged. Schemes that then looked derelict now look healthy. The pandemic has temporarily done for mortality improvements and economic circumstances have done for cheap money. Discount rates are rising and private sector DB schemes are in surplus (on any measure)
The new approach, which – as David Robbins will show – is a return to the old approach, suggests that many of the arguments put forward on this blog and elsewhere, have fallen on fertile ground. Not that you’d know from reading the DWP opinion piece published in professional adviser.
The Government line is in black, my comments are in red. I am an interested observer, not an expert, please post in comments if you feel my reading is incorrect.
The landmark Pension Schemes Act 2021 made our pensions safer, better, and greener. (and more expensive to sponsors)
For defined benefit (DB) pension schemes, the Act strengthened the existing funding regime, requiring DB schemes to have a funding and investment strategy set out and for this to be submitted to The Pensions Regulator (TPR). It also triggered a row in the Lords where there was a revolt among tory peers against a “one size fits all approach to DB funding ” which seemed to recognise closure as the only viable option for a private DB scheme. It seemed only the tax-payer could be relied on to support future DB accrual (which was consigned to public sector schemes of which the Civil Servants and MPs were beneficiaries)
Almost ten million people across the country remain in DB schemes, with around one million of those still actively paying into one. The active members accruing benefit are mostly in the public sector, only 8% (ONS) of private sector members are accruing benefits but a third of public sector members (around 2.3m) are accruing DB benefits. They include the Pensions Minister , the DWP and TPR.
Of the 1m people continuing to accrue in open private DB schemes , the vast majority are in mirror schemes that offer a comparable benefit to that enjoyed in the public sector (USS v Teachers) or a TUPE promise (making up large numbers in the Railway Scheme).
The table below shows how selective the Government are when talking about Defined Benefit schemes. Overall, there are almost as many people still accruing DB benefits as have seen their accrual cease. DB schemes cannot be consigned to be a footnote to DC workplace pensions , they remain the second source of pension wealth , behind the state pension.
Of the 10.45m in private sector DB schemes , around 1m are still building up benefits
We want to ensure schemes are delivering for these savers, wherever they are in their retirement journey. And while most DB schemes are well run, plan for the future, and manage their risks effectively, best practice is not universal.
That’s why we’re building on last year’s progress with new rules and a new consultation, which launches today (26 July).
From my reading, the new rules are – if not a U-turn, certainly a change in direction. The new consultation reminds me just how wrong the original May 2019 proposals were
The old proposals , including the infamous “fast track”, would have made the task of keeping schemes “open” harder – and more expensive to employers. They would have encouraged premature wind-up of many viable DB schemes. They would have made long-term investment in patient capital harder and encouraged investment in Government Bonds over environmentally sustainable and socially useful investment.
Thankfully the new proposals take into account the 1m people still accruing benefits and allow trustees with strong and willing employers to keep schemes open into the future.
The consultation outlines new proposals which will help ensure DB pension benefits can be paid over the longer term – and ensure that all members have the best possible chance of receiving the retirement income they have been promised.
The plans will also enable TPR to intervene more efficiently to protect members when needed. Schemes will submit a statement of strategy alongside a scheme valuation. Where a scheme appears to be falling short of its legal requirements, the regulator can now step in and engage with the scheme to ensure compliance and boost member security. This is the use of the Pension Regulator’s powers, given them in the Pension Schemes Act last year, thankfully, their application looks less likely as a result of the easement of the proposed regulations.
Collectively, DB schemes manage a total of approximately £1.7trn worth of assets. The asset landscape within these schemes is, however, highly fragmented.
Seven per cent of schemes have more than 5,000 members, but these schemes hold approximately 74% of total DB assets. In contrast, more than a third of schemes have fewer than 100 members, and these schemes collectively hold around 1% of total assets.This suggests the DWP still has designs on a less fragmented (e.g. more consolidated) “asset landscape” where assets can work for the common good (some would say -to relieve the Treasury of some of the burden of funding UK infrastructure)
We are committed to ensuring the DB framework works well for this great variety of schemes and sponsors, and the launch of this consultation follows not only last year’s Pension Schemes Act, but an engagement programme with stakeholders connected with a range of schemes, including open DB schemes. This suggests that the Open DB schemes seem to have won the day. Well done to Railpen and others.
Schemes that are maturing will be required to manage their risks carefully, taking proper account of the extent to which those risks remain supportable as they move towards securing members’ benefits (or run-off).
Our proposals also take account of open schemes which are not maturing and have adequate ongoing sponsor support. It is not our intention that such schemes should have to undertake inappropriate de-risking of their investment approaches. Thankfully, the DWP have worked out that it is in everybody’s interest that schemes that intend to stay open, are allowed to do so and invest their capital patiently.
The intention is to have better – and clearer – funding standards, but not to move away from the strengths of a flexible scheme-specific approach. It is nether ‘one size fits all’, nor about micro-managing schemes. Every scheme will be treated on its merits. Which is most certainly a different approach from that proposed in the original DB funding code.
Millions of people rely on defined benefit schemes. Our new rules will help ensure they are protected for the long-term.
Guy Opperman – Minister for Pensions and Financial Inclusion.
So what does this mean for the Pension Regulator’s DB Funding Code?
David Fairs of TPR has been telling anyone still listening that the government’s thinking on the funding code had “evolved” and that it has to wait for the DWP to issue its own regulations before a second consultation could be laid out.
TPR then confirmed in its 2022-2024 corporate plan (published 13 June) that the second of its consultations on the code – which also looks at whether schemes have a suitable long-term funding approach – would take place in the autumn.
The DWP’s proposed regulations (which you can read here) will require a revolution rather than an evolution in TPR thinking.
Follow this brilliant thread from David Robbins which reminds us that there is nothing new under the sun. We are back in a world we have not seen since 2014, but it is a better world than could have been imagined. Ecclesiastes informs
Today’s draft funding regulations formally resurrect the idea that deficits should be cleared as quickly as the employer can reasonably afford, after this was dropped it 2014. See quotes from TPR in 2006 & 2014 and from DWP today. pic.twitter.com/LJRxUdbQar
— David Robbins (@David_J_Robbins) July 26, 2022
See below: (1) TPR’s attempt at circle-squaring from March 2020; (2) Ecclesiastes on defined benefit funding policy. pic.twitter.com/YmGCRxOklJ
— David Robbins (@David_J_Robbins) July 26, 2022
The DWP draft regulations are welcome. They show TPR’s current proposal looks like an OVER-FUNDNG code which addresses a problem that no longer exists – if it ever did.
David Fairs – explaining the original proposals over three years ago at the First Actuarial Conference.
