It’s been a tough week for the Pensions Regulator. They came off second best at the WPF, both to the line of questioning from Stephen Timms, Nigel Mills and others, but also to the FCA who were able to laud it a little. LDI has not been the FCA’s crisis, it has been TPR’s.

There was talk at the Work and Pensions Committee meeting on Wednesday of a single pensions regulator, talk dismissed by Nikhil Raithi , but the threat is there. It’s not so much an existential threat but a threat that TPR loses its strategic importance and becomes no more than an instrument of enforcement.

The DB Funding Code may be TPR’s last hurrah and it looks to be teetering on the edge of not happening. David Fairs – TPR’s policy man, admitted that he was publishing in advance of DWP’s funding regulations because if TPR’s guidance was not under further consultation in 2022, it wouldn’t be in place for 2023.  In practice , that would mean a 5 year gap between the first draft and the last.

So why does the Funding Code matter so much to TPR?

The 2021 Pension Schemes Act gave TPR new powers, powers to enforce compliance with a view of the DB pensions landscape that had by the end of last decade, become orthodoxy.

Broadly speaking, the view was that in a world of low interest rates, schemes would struggle to a point where they were free of the need for an employer, by following a simple set of rules that became TPR’s “fast-track”. It worked like this

1. Trustees have to consider the employer’s capacity to meet their demands (the covenant)
2. The less comfy Trustees are, the less risk they can take and the greater the demand (deficit contributions)
3. Leveraged LDI was a way of easing the pain (with little perceived risk) doubling down on bonds meant more room for growth assets, higher discount rates and lower deficit contributions.

All of this works well in a low interest world but when interest rates go up fast the following happens

1. Schemes are suddenly in the clover and have no need for deficit contributions
2. Except that the leverage is so destructive that it blows up LDI pooled funds, the asset base of schemes small and large and it nearly takes the long dated bond market with it
3. Employers are now going to have to make good the damage but are now thoroughly fed up.

It’s not just employers who are fed up, so is Government – or at least the Government ex TPR. Infact TPR is now being fingered for not just condoning the toxic LDI pooled funds, but promoting them.

So the DB funding code becomes super-important – it is TPR’s way of justifying why it wanted these powers it got in PSA21, it’s a way to demonstrate it can be pro-active to Government and it’s how it can show that leveraged LDI is safe in its hands. Which is why the new version of the DB funding code has been tweaked to take into account the new economic environment.

Will it work?

The front foot approach adopted by David Fairs at the end of this week is very high-risk. It is predicated on the DWP’s new funding regulations (also due out any moment but possibly not in time for TPR) getting the nod from parliament.

This is a huge test. It will be Laura Trott’s first major challenge and probably her biggest one (bearing in mind the limited duration of this parliament).

The WPC are, in my opinion, likely to severely criticise how LDI has been managed and though providers and consultants will be in the frame – so will be TPR. The Funding Regulations will almost certainly tacitly endorse more of the same , when it comes to the pre 2022 status quo and this will meet serious opposition , not just from labour benches but from Conservatives (some of whom were on the WPC committee). The House of Lords looks even less comfortable. Sharon Bowles is only one of a number of sceptical peers on the Lords “Industry and Regulation” Committee who clearly see little good in LDI and not much good in the current practice of valuing liabilities with reference to the gilt rate.

So there is no certainty that the DWP’s Funding Regulations will get royal assent. Whether the Bill gets thrown out or is neutered, it could mean TPR’s Funding Code is left high and dry, guidance to keeping rules that are not in place.

Is the DB Funding Code any good?

If the DB funding code works , it will see the vast majority of DB schemes having been exchanged for bulk annuities offered by insurers or subsumed into master trusts or in a care home called a DB master trust or at the very least supervised by a professional – preferably corporate trustee.

If it doesn’t work , there will be a lot of small schemes in the PPF and a lot of companies insolvent with employees looking not just at reduced pensions but at getting new jobs.

Thankfully, the PPF see future insolvencies as continuing to be lower than many had anticipated when the lifeboat was set up. The PPF, as demonstrated at the WPC last week, knows a lot about risk – and as regards leveraged LDI, rather more than TPR.

A lot of what TPR wants to happen  is happening but not nearly fast enough for DB to continue to be an accident waiting to happen, there aren’t enough trustees, master trusts are proving unpopular and the insurance companies are getting very picky, meaning that queues for buy-out are already as long as an NHS waiting list.

Talking with a senior industry figure who had overseen over 350 small DB schemes with LDI over the crisis, I was amazed how co-operative sponsoring employers have been.

The DB funding code demands more compliance, more deficit contributions and a lot more patience from employers.

Is the DB funding code any good? Ask sponsoring employers. I suspect their voice will be heard by MPs and members of the house of lords.