The pensions landscape has witnessed a significant milestone this week as The Pension Regulator’s (TPR) new Defined Benefit (DB) funding code was laid before Parliament. Following extensive industry consultation, this long-anticipated development heralds a new era of pension regulation. The new code is a response to the evolving challenges faced by DB pension schemes and aims to encourage good long-term planning and risk management behaviour. It includes guidance and expectations from TPR on how to comply with the Funding and Investment Strategy requirements. In particular, the code includes guidance on how trustees can set funding plans in line with the support their sponsors can provide and how maturing schemes can move to a point of low dependency on their sponsor.
One of the key aspects of the new code is the emphasis on risk management. Trustees are expected to have a deeper understanding of the risks their scheme faces and to develop strategies to manage those risks effectively. This includes considering the employer’s covenant, investment risks and operational risks, among others. The code encourages trustees to take a forward-looking view and to be proactive in their risk management approach.
Once in force, it will replace the existing DB funding code for valuations with effective dates on or after 22 September 2024. The DB regulations, which align with the DB Funding Code, came into force in April this year and apply to valuations with effective dates on or after 22 September 2024. However, there will be a gap between when the new code comes into force and when the requirements of the Funding and Investment Strategy Regulations start applying. TPR has confirmed that schemes with valuation dates in this period can use the new DB funding code as the base for their approach.
Note that this emphasis on the need for trustees to understand their risks and manage them effectively is also a theme of TPR’s review, published this week, about pension trustee compliance with their wider ESG duties. While trustees generally adhere to their ESG obligations, their compliance is often minimal. Notably, trustees tend to lack active engagement with their ESG policies and oversight when these are delegated to managers, especially when investments are in pooled funds where their influence is limited. It is advised that trustees should actively manage ESG concerns and not just rely on asset managers, and they should also scrutinise the ESG policies of fund managers for schemes invested in collective funds.
The Pension Regulator’s Market Oversight: ESG report can be accessed here
