Tuesday 3 March 2020 2:58 pm

Pensions regulator launches consultation on tougher defined benefit rules

The Pensions Regulatory (TPR) today launched a consultation on new tougher rules on the funding of defined benefit pension schemes.

TPR is proposing a twin-track approach to funding defined benefit schemes, which are pension funds where an employer legally has to make up any shortfall in the event that the scheme is underfunded.

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Under the proposals, trustees will be able to choose either a fast track or a bespoke approach to completing and submitting a valuation of their scheme.

If a trustee can demonstrate their valuation meets TPR’s guidelines, it can follow the more straightforward but prescriptive fast track approach.

The bespoke option will offer more flexibility but require greater supporting evidence from trustees about how they will manage risk and may attract greater regulatory scrutiny.

Martin Jenkins, head of pensions at law firm Irwin Mitchell, said: “The timing is unfortunate. The latest figures say £100bn has been wiped off pension fund assets because of the market reaction to coronavirus and a lot of embattled CFOs will say they are still working through some of the complexity of the existing regime.”

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The TPR said schemes should develop appropriate recovery plans in cases where a funding shortfall arises.

It will also expect trustees to set a funding and investment strategy to try and reduce the reliance of the scheme on the sponsoring employer.

TPR’s executive director of regulatory policy David Fairs said: “With most DB schemes closed to new members and/or future accruals, we can expect them to be significantly mature in 15 to 20 years’ time, with the majority of their members retired. 

“These schemes will be more vulnerable to risks associated with poor funding levels and shorter investment horizons. 

“Therefore, trustees should aim to reduce their scheme’s reliance on the sponsoring employer as they mature.”

Jenkins added: “One of the difficulties the TPR has is the complexity of its approach because it is trying to cover such a wide type of defined benefit schemes and the organisations behind them. You end up with a very complicated regulatory structure that is quite a battle for your average CFO to engage with, let alone the trustees.”