The Pensions and Lifetime Savings Association (PLSA) has supported the principles of the new defined benefit funding code but told the Pensions Regulator (TPR) that large parts of the detail of its proposals need more work.
In its response to TPR’s defined benefit funding code of practice consultation, the PLSA expressed concern that the proposed code is too prescriptive with elements too ‘one-size fits all’ which may lead to outcomes that are not in savers’ interests.
This undermined many of the potential benefits for schemes and the Regulator of the new ‘Fast track’ and ‘Bespoke’ approaches, and the key benefits of the scheme specific funding regime. The PLSA has urged the Regulator to look again at its approach and seek to provide greater optionality for schemes within the ‘Fast track’ route, and ensure the ‘Bespoke’ approach was not anchored to its fixed assumptions. This would ensure the code reflects the variation between schemes and employers across the industry.
The PLSA supports the Regulator’s approach to encouraging schemes to reduce their reliance on employer support and reduce investment risk as they mature, but warns the proposals on these key areas are too inflexible and may have negative consequences or result in unnecessary de-risking, which would not be advantageous or desirable for many schemes, and in particular those with a strong employer covenant.
The PLSA also has significant concerns that the consultation’s proposals might unintentionally hasten the closure of open DB schemes. The requirement to fund accrued benefits in the same way as benefits for retirees would place a significant burden on funding requirements and did not reflect the differing dynamics and time horizons of many such schemes. The proposals could mean new accruals may become prohibitively expensive, when in practice benefits would not come into payment for many decades.
The PLSA agrees that all schemes should be encouraged by TPR to be robustly funded and, over the shortest possible time horizon, close any deficits. However, it is also important the Regulator reviews its assumptions to account for the effect of COVID-19 and the expectation that wider economic pressures may result in fresh short-term pressures on schemes and employers and the need to re-examine recovery plans.
Tiffany Tsang, Senior Policy Lead: LGPS and DB, PLSA, said: “While the PLSA strongly supports the aims and objectives of the proposed code to reduce pension deficits and secure funding for retirees’ pensions, many of the rules proposed by TPR are too prescriptive and could result in worse outcomes for savers. They may also lead to the unnecessary closure of some open defined benefit schemes, especially as the UK enters a more challenging economic environment.
“We look forward to working with TPR to address these issues, as well as how these principles will apply to the multi-billion pound Multi-Employer Schemes, which have been deferred until the follow-up consultation in 2021.”
Click here to download the full consultation response.
Mark Smith, Senior PR Manager
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Steven Kennedy, PR Manager
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