Commenting on TPR’s consultation on its draft code of practice, Laura McLaren, Head of Scheme Actuary Services at Hymans Robertson, says: 

“Despite today’s consultation being several years in the making, there are few real surprises. The dual “Fast Track” and “Bespoke” compliance routes have been well-trailed and TPR’s thinking has not shifted fundamentally. Nonetheless, getting the details pinned down in 204 pages of consultation material is an important step forward. As a regulatory tool, Fast Track needs to be sensible and proportionate, but it doesn’t need to be perfect. Through that lens, it’s difficult to find much to pick fault with. Other than setting one Fast Track for the whole range of sponsor covenants, the framework is close to TPR principles put forward almost two years ago. Given the consultation timings, it’s hard to see TPR shifting much from this draft, so it’s good that what’s been put forward looks suitably pragmatic.

“There are two new aspects in TPR’s consultation that catch the eye:

• The technical details of Fast Track sit outside TPR’s regulatory code. This is a nifty idea from TPR, that means they won’t need to go back through parliament to fulfil their intention of reviewing Fast Track annually, with a deep dive every three years.
• Clear, directive instructions to trustees on how to evaluate their sponsor’s business, focusing on visible availability of free cashflow and long-term prospects. Some sponsors should be nervous about their trustees having a larger say in dividends and early loan repayments.

“The code is getting a 14 week consultation, which it needs given the level of complexity. But this won’t leave much time before the finalised new code is scheduled to launch in October 2023. We see much of the clarity that trustees and sponsors need to start planning meaningfully. But some big concerns will gnaw at this, such as resolving the over-prescription in DWP’s draft regulations and getting clear about how TPR will actually deal with schemes taking their Bespoke route.

“One of our enduring priorities for the new code has been for a Bespoke route to offer genuinely scheme-specific flexibility. We’re pleased to see how hard TPR has worked to allay concerns that Fast Track would effectively be a benchmark for Bespoke compliance. But we remain a long way from reassured that the DWP’s overly-restrictive draft regulations will enable TPR’s intentions for  Bespoke compliance to work in practice.

“TPR’s behavioural assessment suggest around 1 in 4 schemes of the UK’s 5,051 DB schemes are a long way from meeting its Fast Track parameters. On TPR’s maths it would actually cost UK business £95bn less if all schemes were forced onto the new Fast Track, although TPR hope there won’t be much ‘levelling down’ of funding plans. Underneath the total impact will be a range of winners and losers. This is where TPR’s Bespoke regulation is especially important, to maintain scheme specific flexibility for challenging situations like schemes already at significant maturity, schemes with weak or unusual sponsors and open schemes. The lack of any transitional easements into a new regime will make it particularly stressful for schemes with valuations due in 2024.”

Commenting on the systemic risks and policy implications, Patrick Bloomfield, Senior Actuary at Hymans Robertson, added:

“The policy intent to get DB schemes well-funded and defensively invested by the time all members have retired is near-universally supported. But influencing £1.5 trillion of assets towards a single destination, using a single approach and set of models can only heighten systemic risks. TPR’s plan to manage such risks is for schemes to hold larger collateral buffers. It costs pension schemes money to run a bigger shield against political incompetence and geopolitical uncertainty. The largest UK schemes should consider strategies that are less systemically vulnerable.

“A concern which TPR doesn’t address in its draft code, nor did DWP in its draft regulations, is how they fundamentally strengthen the way that the British government is directing private pension trusts to invest in British government bonds.

“Despite TPR’s reassuring words, we remain concerned that the over-prescription in DWPs draft regulations will put disproportionate cost burdens on a small number of large employers. Standing in the snow today, it’s hard to see the case for making DB schemes even more secure when businesses are grappling with cost of living strikes, Brexit and recession pressures. With such wide-reaching ripple effects on pay rises, jobs and current workers’ pension savings, a more detailed impact assessment is essential, before parliament can pass this code and the accompanying regulations into law.”