During the passage of the Pension Schemes Bill one of the big areas of contention was the potential implications of the new approach to scheme funding for open DB pension schemes. This issue formed the basis of one of the Government’s defeats in the House of Lords, although this was later overturned in the House of Commons. It remains to be seen whether the House of Lords will again challenge the government on this issue when the Bill returns to the Lords.

However, a new blog published this week from TPR head of policy David Fairs (see DB funding code: busting a few myths | The Pensions Regulator Blog) seems to offer an ‘olive branch’ to open pension schemes, and especially those which are open to new members to join. When the original draft funding code was published for consultation in March 2020, many open schemes were concerned by the now-famous statement that:

“Members’ accrued benefits in open schemes should have the same level of security as members’ accrued benefits in closed schemes.” (p6, consultation document)

This was taken by many to imply that open schemes, even with a flow of new members and therefore not at a ‘mature’ stage, would still need to de-risk their investments in order to provide ‘the same level of security’ as for closed schemes.

The wording of the original consultation stressed the hurdles that trustees would need to overcome if they wanted to take more investment risk than for a closed scheme. It said:

“Trustees who use different assumptions or a different approach to funding [to that proposed for closed schemes] because the scheme is open to future accrual or new members would need to explain why this is appropriate in terms of the employer’s plans for staying open and the future covenant strength”.

However, in his most recent blog, David Fairs uses much softer language saying simply: “trustees should be able to evidence to us how they could (among other things) manage the risk of their scheme closing or maturing faster than expected”.

There are other hints in the blog that a more accommodating approach may be taken to open schemes, with the Pensions Minister’s statement in Parliament that the concerns raised on this issue “will definitely influence the regulator’s approach”. David Fairs also mentions the possibility that legislators might opt instead for a completely separate regime for open schemes, separate to the Fast Track v Bespoke approach currently proposed.

However, the blog does also hint that amongst open schemes there will be a distinction made between those which have a steady flow of new members and are therefore still ‘immature’ and those which might see themselves closed to new members in the short to medium term and which will need a more urgent plan as to how they would move to the funding approach appropriate to a closed scheme.

Commenting on the new blog, Shayala McRae, a senior consultant at LCP who has studied the text of the various documents in detail said:

“The latest blog from TPR could offer some ‘comfort and joy’ to open DB schemes this Christmas. Whilst the Regulator stresses the continuity between its current position and its earlier consultation, there is a clear difference of emphasis in the latest statements. At the very least, TPR believes that its intentions may have been misunderstood and that it always planned a more flexible approach for fully open schemes with a flow of new members. It will be interesting to see how this is reflected in the regulations which flow from the Pension Schemes Bill and in TPR’s second round of consultation on its new funding code which is expected later in 2021”.