ON THIS PAGE
- DB Funding Code laid in Parliament
- TPR updates DB superfund guidance
- TPR publishes review of trustee ESG compliance
- Save the date: Pensions Academy Online 17 and 19 September 2024
Welcome to your weekly update from the A&O Shearman Pensions team, covering all the latest legal and regulatory developments in the world of workplace pensions.
DB Funding Code laid in Parliament
The final draft DB Funding Code has now been laid in Parliament. There will be a gap between 22 September 2024 (schemes with an effective valuation date on or from this date must comply with the new requirements set out in legislation) and the Code coming into effect. However, the Code is ‘a clear indication’ of what the Pensions Regulator (TPR) intends the final Code to be, and trustees, employers and advisers can use it to inform their approach. If the Code changes as a result of the Parliamentary process, TPR will take that into account.
By way of a brief reminder, the revised DB funding regulations require trustees to set a funding and investment strategy which identifies a long-term objective for the scheme, as well as the funding they intend the scheme to have reached and the investments they intend to hold at the ‘relevant date’. The ‘relevant date’ must not be later than the end of the scheme year in which the scheme reached/is expected to reach significant maturity. ‘Significant maturity’ is calculated on the basis of the scheme’s duration of liabilities using economic assumptions as at 31 March 2023 (this date is set in the regulations), but the point of significant maturity is set by TPR in the Code. Key points to note from the final draft Code are:
- A scheme will reach significant maturity on the date its duration of liabilities is ten years (for cash balance schemes, this will be eight years) – in the first draft code this was set at 12 years. As set out above, the assumptions underlying this measure are fixed with reference to the economic conditions as at 31 March 2023 in the funding regulations and the Code includes further explanation of how this is interpreted.
- In response to consultation feedback, the Code clarifies that investment decisions in relation to the scheme’s actual investment allocation are not constrained by the notional investment allocation (which is used to derive and support actuarial assumptions). This applies both at low dependency and along the journey plan. TPR expects that trustees will align their actual investment strategy with the funding and investment strategy but the Code does not interfere with trustees’ existing investment duties.
- In some areas, for example the assessment of resilience to adverse changes to market conditions and the determination of the maximum level of risk that could be supported by the employer covenant, a principles- based approach has been introduced to provide additional flexibility.
- A new section of the Code has been introduced, providing guidance for open schemes. The Code also provides additional guidance on attributing value to contingent funding mechanisms, together with TPR’s expectations in relation to employer covenant assessments, including the reliability period (the period over which trustees can be reasonably certain of the reliability of an assessment of the employer’s cash flows and prospects) and covenant longevity (how long trustees can be reasonably certain that the employer will be able to continue to support the scheme). TPR suggests that most employers will only have reliability over a period of three to six years, and that reasonable certainty over covenant longevity will not exceed ten years – but either of these may vary due to employer-specific factors.
- The final draft of the Code includes a range of other clarifications in response to consultation feedback, as well as references to climate change risk (for example, in relation to assessing the resilience of the investment portfolio in relation to discount rates and assessing the employer covenant). TPR’s revised covenant guidance (see below) will include further guidance on trustees’ assessment of ESG matters.
TPR’s consultation response in relation to the statement of strategy and associated templates will be published in the autumn. Further guidance will be published in due course on TPR’s approach to regulating DB schemes, including more detail on the twin track approach and regulatory filters used to assess valuations for further engagement. TPR will consult on updated covenant guidance covering areas such as employer cash flows, contingent asset support, maximum affordable contributions and affordability for recovery plan purposes.
Also published is TPR’s response to the consultation on its twin track regulatory approach to assessing valuations and the proposed design of the ‘Fast Track’ tests and conditions. Where schemes choose to meet a series of Fast Track parameters, TPR is less likely to engage with trustees based on the scheme valuation submission. TPR has made only limited changes in response to consultation feedback, but has revised its parameters in relation to the definition of significant maturity and market conditions. The Fast Track parameters will be published as a standalone document when the Code comes into force.
Read the Code
Read the DB funding Code consultation response
Read the Fast Track and regulatory approach consultation response
TPR updates DB superfund guidance
TPR has published updated guidance for DB superfunds setting out its expectations around capital release – namely, that capital can be released up to twice a year, subject to meeting a specific trigger and safeguards rather than (as previously stated) only when benefits are bought out.
TPR also comments in the associated press release that the standard capital adequacy requirements for a transfer may be relaxed where a scheme’s sponsor is insolvent and the scheme cannot afford to buy out benefits or to enter a superfund or capital backed arrangement on full capital adequacy terms. Trustees would need to be confident that the transaction was in members’ best interests and that, even on the lower capital adequacy basis, members will receive a materially better level of benefits than on a buyout at PPF+ levels.
Read the press release
Read the guidance
TPR publishes review of trustee ESG compliance
TPR has published a market oversight report setting out findings from its review of how pension scheme trustees are complying with their ESG duties, based on a review of statements of investment principles and implementation statements. Overall, TPR would like to see more than minimum compliance in respect of the contents of these documents.
Key takeaways from the report include:
- TPR wants to see greater evidence of trustee oversight where the management of financially material risks, engagement and voting have been delegated to an investment manager – for example, trustees should explain how they monitor and engage with asset managers about relevant matters, including environmental and social impact and corporate governance.
- Where schemes are invested in pooled funds, TPR expects trustees to find ways to show active engagement and advocacy for their scheme’s ESG policies. A list of suggestions is included, such as engaging with prospective providers on their willingness to take into account expressions of wish or collective voting policies; use of collective voting policies (and incorporating these into contractual arrangements with asset and fiduciary managers); and regular engagement ahead of each voting
- TPR expects more scheme-specific detail to be provided on voting activity, including a summary of voting information in the implementation statement (not just a link to asset managers’ webpages).
- TPR encourages trustees to go beyond climate change reporting to include other material ESG considerations, such as nature loss and social factors.
Read the report
[View source.]
