Damp squib or brave new world?

Actuaries spent most of 2024 waiting for The Pensions Regulator to finalise and implement its new funding code for defined benefit pension schemes but it's now in force...

The new defined benefit funding code

The new funding code has been so long in gestation – it started with a DWP White Paper in March 2018 – that it managed to be delayed by not one but two general elections!

But it’s now in force for actuarial valuations from 22 September 2024 onwards, and during 2025 we will be assisting those clients whose good fortune (or otherwise) it is to have a valuation due under the new regime.

In some ways, the new funding code has been overtaken by events. It was conceived in an era when schemes' funding positions were generally much lower than they are today. And, when pensions scheme failures regularly filled the newspapers, and even prime time TV; the Pension Select Committee hearings on Carillion and BHS were compulsory viewing, at least for pension professionals.

The new funding code is The Pensions Regulator's (TPR) response to the criticism it received in the light of those failures, and is intended to improve the security of members’ benefits.

But there has been a significant general improvement in funding from 2022 onwards, on the back of the rise in bond yields (to which Liz Truss and Kwasi Kwarteng were significant contributors). So for many schemes ongoing funding is no longer a major concern, and focus has shifted to their endgame.

For these schemes, the new funding code will be largely irrelevant, as it will not affect what they are actually intending to do, particularly if their endgame is a buyout. They will need to be able to demonstrate that they follow the new rules, but it won’t influence the plans they have already developed.

The new defined benefit funding code

TPR has established two routes for demonstrating that a scheme’s valuation is compliant with the new funding code, ‘Fast Track’ and ‘Bespoke’. A scheme valuation needs to pass some prescribed tests (of funding strength, investment risk and contribution levels) to qualify for Fast Track, and if it does, then TPR are unlikely to query it.

TPR estimate that four out of five schemes will qualify for Fast Track with either no, or no material, change to their funding approach. For these schemes, the new code is little more than a damp squib. The focus will be on demonstrating compliance in a proportionate and cost-effective manner.

Cartwright are engaging with TPR to encourage them to take a pragmatic and sensible approach. Regulators seem to have a natural tendency to request increasing volumes of information, which we are urging them to resist!

For those schemes which follow a more bespoke approach, TPR will always require evidence-based justification for any non-standard features.

We have revised our valuation modellers to provide the additional actuarial information TPR will require, and we look forward to supporting trustees with their valuation submissions in this Brave New World.

Will the new funding code be worth the wait? Will it be changed? Some have argued that it runs counter to the Government’s desire for schemes to increase their investment in productive assets.

We look forward to assisting our clients in getting to grips with it during 2025. It will be interesting to see how the code develops as the year unfolds.

^{Will the new funding code be worth the wait? Will it be changed?}