The final version of the Defined Benefit (DB) Funding Regulations was published by the Department for Work and Pensions (DWP) on 29 January 2024. The regulations will come into force on 6 April 2024 and will apply to scheme valuations with an effective date on or after 22 September 2024.
The legislation to provide for a new DB funding regime was introduced in the Pension Schemes Act 2021 – please see our previous article here – although the changes to the DB funding regime were first mooted in a 2017 government green paper. The new regime is expected to be the biggest change in DB funding and investment strategies in nearly 20 years.
TPR’s revised DB Funding Code of Practice has yet to be published in its final form and we are also awaiting revised covenant guidance. Until we have all of these, it is difficult to fully assess the impact of the changes. However, it is clear, from the revised regulations, that the government has taken on board concerns which were raised in response to the consultation on the draft of TPR’s Funding Code published in December 2022 (for a fuller explanation on the Funding Code, please see our article here). This means that the now finalised regulations include some important adjustments to bring them more in line with responses received from the industry during consultation. In particular, the regulations now embed key flexibilities that were apparent from TPR’s draft Code, such as:
- the regulations do not constrain the actual investments made by a scheme. Even mature schemes can invest in a wide range of assets;
- it is clear that a sponsoring employer’s need to invest in the sustainable growth of its businesses is a matter for trustees to consider in assessing employer affordability;
- it is explicit that open schemes can take account of new entrants and future accrual when determining when the scheme will reach significant maturity; and
- the regulations should make long-term planning and implementation easier and avoid unnecessary administrative burden – for instance, the regulations give TPR the flexibility to ask for less detailed information in some cases, depending on the circumstances of the scheme.
In view of this flexibility, the DWP has also decided against transitional arrangements, arguing that the industry has had sufficient time to prepare for the April 2024 launch date, with most DB schemes not needing to make radical changes due to the built-in flexibility that the regulations will provide.
The regulations signal a significant shift for trustees and sponsoring employers, with the government believing that these clearer funding standards will facilitate greater risk-taking where trustees believe it is appropriate and in line with their fiduciary duties. This, in turn, supports the wider policy aim of encouraging investment in productive finance, while ensuring that members’ benefits are secure. The government’s proposals on superfunds, DB surpluses and the expansion of the PPF’s role are all aligned with this policy aim.
The pensions industry has broadly welcomed the regulations, although many are reserving judgement until the final DB Funding Code is published, and trustees and sponsoring employers should bear in mind that further changes could lie ahead. In announcing the finalised regulations, DWP has acknowledged that TPR will be considering its Fast Track valuation parameters in light of the changing market conditions since its original analysis was carried out.
We will continue to provide updates on this front. If you would like to discuss anything raised in this article in more detail, please do get in touch with a member of the Dentons Pensions team or your usual Dentons contact.
