The Pensions Regulator’s new DB funding code

The summer has barely ended (if it ever started), but with pumpkin spiced lattes already hitting the high streets and Christmas decorations looming on the horizon, it feels as if September slipped away unnoticed. But (arguably?) eclipsing the joys of Halloween, Bonfire Night and Christmas offered up by subsequent months, September 2024 held the honour of marking the introduction of the most significant changes to the DB scheme-specific funding regime for almost 20 years, which kicked in for actuarial valuations on or after 22 September.

It has been a long journey by any standards, but the final plank in the new regime was laid at the end of July, with the publication of The Pension Regulator’s new DB funding code, which is currently making its way through Parliament.

So, what should we make of where TPR has finally landed?

When passing judgement, it’s important to remember that TPR is largely hamstrung by what the legislation says. Without digging back over lost battles, there are a number of frustrating structural issues embedded in the regulations along with a few sections that are horribly opaque. Once the regulations were finalised it was beyond TPR’s powers to fully address those issues, and it was always going to be a struggle for TPR to create a masterpiece based on such shaky foundations.  On the whole, however, I think they have done a pretty good job of addressing the concerns we raised around the first draft. In particular, some of the overly prescriptive sections that could have been unhelpful have largely or completely disappeared; the final version is much more focused on the principles that TPR expects trustees to follow, with a lot of the detail stripped back.

We also need to keep in mind the status of the Code and the position that it plays in the funding regime. With one notable exception the Code does not set out ‘requirements’ that schemes must follow; rather it sets out TPR’s expectations and interpretations of the legislative requirements (where they are open to interpretation). On that basis, having clarity in the Code is helpful, but ultimately the Code cannot and should not tell trustees or sponsors what is ‘right’ for their scheme; they still need to take advice and reach their own conclusions of what is right for their scheme taking the Code into account, just as they have done since the scheme-specific funding regime was first introduced. On that basis I think the Code gives us enough of a steer on TPR’s thinking, without unduly constraining creative thinking. Whilst some might bemoan the lack of clarity and direction, I regard a principles-based approach as providing much more scope to reach agreements that reflect each scheme’s unique circumstances, and I think that will serve members’ interests better than schemes being ‘herded’ by TPR’s views.

The Code is a pretty long read at almost 100 pages and there are inevitably a few dry sections (even for actuarial tastes), but rather predictably I do think it’s worth investing the time to read it. But what are my main points of note, focusing in particular on areas where I believe there is either room for alternative interpretations of what the legislation requires, or where there are still outstanding questions?

There are clearly a lot of questions to be considered as trustees, sponsors and advisers get to grips with the new regime. We held a webinar with TPR on 27 September that provides more insight into TPR’s thinking, but I have no doubt that the first round of valuations under the new regime is going to be an interesting journey for everyone involved!