What could revisions to the new Defined Benefit funding regime mean for your business?

A handful of high-profile failures in the early 2010s prompted calls for reform of the Defined Benefit (DB) funding regime to ensure schemes were being managed effectively. Six years on from the government’s Protecting Defined Benefit Schemes White Paper in 2018, the Department for Work and Pensions (DWP) has now finalised its intentions for the new regime and will be laying regulations in April – with schemes with valuation dates from September 2024 then in scope of the new regime.

Despite the DWP’s 2018 White Paper concluding that there was ‘no systemic problem in the existing regulatory and legislative framework’, the new regulations will still act as a barrier across the DB pensions sector. Most importantly, they reduce the ability of the Pensions Regulator (TPR) to take a truly scheme-specific approach to funding that appreciates the unique circumstances of schemes.

This in turn will impact how most schemes – and not just those few where member benefits are at risk - approach investment and sponsor funding decisions. However, the government's final regulations have been improved in line with some of the CBI’s recommendations.

DWP’s new regulations have:

• Been made more consistent with TPR’s proposed DB Funding Code: Whilst still restrictive, this allows for additional flexibility than in the regulations originally proposed by the DWP. Addressing the significant inconsistencies between the regulations and the Code was a key CBI ask. It was needed to avoid confusion and the adoption of an overly cautious approach by trustees that would have seen them default to the requirements of the original regulations, regardless of what was set out in the Code.
• Addressed the problematic way in which ‘significant maturity’ was previously defined: This could have been volatile to short-term changes in market conditions. This problem has been resolved by anchoring the calculation of significant maturity to market conditions at a set date. As the CBI called for, the specific 'duration of liabilities' at which a scheme reaches significant maturity will also now be set out in TPR’s Code, allowing for more flexibility based on the type of scheme.
• Improved the ability for mature schemes in surplus to continue to invest in illiquid, productive assets: This has been achieved by a) removing the requirement that cashflow from those investments at that stage broadly matches with the payment of pensions, and b) making clear that the objective to invest in a 'Low Dependency Investment Allocation' at maturity does not apply to surplus funding. The CBI's consultation response called for mature well-funded schemes to be able to invest in productive illiquid assets.
• Added that investment in the sustainable growth of the sponsoring employer is a matter to consider: Alongside the 'affordability principle', which will require trustees to seek to close deficits as soon as the sponsor can reasonably afford, they will now be required to consider the need to support employers to invest in their own sustainable growth. Which, after all, is the greatest guarantee of member benefits.
• Delayed the effective date of the regime: This would have applied to schemes with valuation dates from October 2023 but will now apply to those with effective dates on and after 22 September 2024. The CBI called for a delay to the new regime, which originally could have only given 3 months between final clarity in the design of the new regime and its application. With the final regulations expected to be laid in parliament in April 2024 and TPR's finalised DB Funding Code scheduled to be published around the same time, the timetable could still be a challenge but will be more manageable than previously. If there is another delay in publishing the DB Funding Code however, that benefit could be eroded.

The new regulations respond to some of the CBI's concerns in 2022 that the new regime would result in unnecessary overfunding and de-risking of DB pension schemes. Businesses may however still want to look closely at TPR’s final DB Funding Code when it is published and engage their advisors on what the new regime could mean for them.  

For more information about the CBI’s work on pension policy, please contact Policy Manager, Laurence Raeburn-Smith.