The DWP’s recently published regulations on the funding of Defined Benefit pension schemes are an improvement on the first draft but still represent a missed opportunity, according to LCP Partner David Fairs. David was previously Executive Director of Regulatory Policy, Analysis and Advice at The Pensions Regulator and was involved from the beginning of the process of designing a new DB Funding Code and associated regulatory framework. 

According to an analysis of the regulations by David Fairs, published today by LCP, this latest version of the regulations is to be welcomed because it clears up some areas where the previous draft was unclear or inconsistent with TPR’s proposed funding code, especially with respect to open schemes.   

The new version also addresses a challenge in the way that ‘significant maturity’ was previously defined. The first version linked the date at which a scheme would be treated as significantly mature (and hence have to have substantially de-risked its investments) to a combination of scheme demographics and market conditions, notably interest rates. With the huge volatility in markets in recent years, the date of significant maturity would have been highly unpredictable and would not have formed a rational basis for long-term planning for schemes. Under the new regulations, this problem has been resolved by anchoring the calculation based on market conditions at a set date – March 2023. 

However, where schemes are well funded beyond significant maturity, David Fairs argues that an opportunity has been missed to make better use of scheme assets. He points out that a scheme that is funded in line with the Code, on a prudent basis, is likely to run up a surplus. Schemes which run on in this scenario can invest more in the kind of ‘productive finance’ assets that both the present Conservative government and a potential Labour government would like to see. But the framework for running a surplus - and potentially extracting some of it – remains rigid, and many schemes will simply buy out. Whilst this may be the right answer for some, it represents a missed opportunity to make the most productive use of the assets built up often over decades. 

Finally, David Fairs also notes that although the Impact Assessment indicates that the new regulations will imply an extra £7 billion being paid into DB pensions, this is over a ten-year period and in the context of a DB universe of more than 5,000 schemes. Given the recent big improvement in scheme funding, if an average of just £600,000 extra per scheme per year is the consequence of this whole new regime, David Fairs says that ‘many might be asking if it is still necessary?’   

Commenting, David Fairs said: 

“It has been a long and winding road to get to this point in the process, including the shock of the pandemic and the period of economic and political upheaval that has followed. So, it is good that the revised regulations have finally been published and that the new funding code will come into force later this year. There is much that is good in the new regulations, and they deal with important challenges to the first draft, including around the definition of ‘significant maturity’.

“But I cannot help thinking that they also represent a missed opportunity when it comes to a world in which growing numbers of schemes have the potential to run on and generate surpluses. The vast sums still held by DB pension schemes, and particularly the largest and best-funded schemes, have great potential to be put to more productive use. In my view, the regulations could have gone further to facilitate these new possibilities, encouraging and enabling schemes and their sponsoring employers to make the best use of the assets which have so painstakingly been accrued over the decades.”