Pension funding rules should be sent back to the drawing board

LONDON, 11 October 2022 — Responding to the Department for Work and Pensions' consultation on Defined Benefit Funding rules, WTW said the draft regulations on defined benefit pension funding would impose a narrow, simplistic and overly rigid framework. With a consultation on the regulations closing on 17 October, WTW is encouraging schemes to make their concerns known to the Department of Work and Pensions. The consultancy has also written to ministers in DWP and HM Treasury to underline its main concerns.

Rash Bhabra, Head of Retirement, Great Britain, WTW, said: “The seed from which these new regulations have grown was first planted in 2018, when the Government acknowledged that the existing scheme-specific funding regime works well for most schemes but sought to make it easier for the Regulator to police the minority.

“Prioritising enforceability above all else has meant inserting too much prescription into what was supposed to be a principles-based framework. There is little flexibility around the ‘low dependency’ positions that schemes must target, nor around how quickly they must get there. One-size-fits-all low dependency targets could crowd out investment in infrastructure and other secure income asset classes, concentrating investments – and the associated risks – in gilts and credit that target very low returns.

“For some schemes, the regulations will also increase how much the sponsor needs to contribute over the next few years – potentially detracting from the Government’s growth agenda where contributions displace investment in the business – or make it more likely that the sponsor terminates further benefit accrual.

“Long-term funding plans that have been painstakingly agreed between trustees and sponsors could have to be reopened when the measure of how mature a scheme is moves around with market interest rates: there are schemes who would have seen their date of ‘significant maturity’ come forward by seven years during the past 12 months.

“In other policy areas, the Government has shelved proposals that it inherited. These pension funding regulations should also be sent back to the drawing board. The next iteration should retain the aim for all schemes to have clearly articulated funding and investment strategies with an appropriate focus on the longer term, but should recognise that less nuanced approaches may prove less robust.”

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