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Our response to the draft Funding Code of Practice (the “Code”) and Fast Track regulatory approach consultations.​

Our paper sets out Isio’s responses to the detailed questions raised in the consultation, along with our high-level comments below:

Overall approach

As an organisation we are supportive of the principle that schemes should have a journey plan in place for meeting their objectives with risk being taken at a supportable level. Therefore, we welcome the direction of travel of the draft Regulations and Code, subject to the time and cost burden on schemes being proportionate to the outcomes achieved.

Interaction with Regulations

We were also encouraged to see that TPR has taken a pragmatic interpretation of the draft Regulations in a number of areas, e.g. the low dependency investment strategy, and the resulting flexibility in the draft Code to reflect scheme specific circumstances.

We would request that TPR and DWP work together ensure the Regulations are compatible with the principles set out in the draft Code. We understand that the Code reflect Government policy. However, in line with other industry stakeholders, we have concerns that compliance with the Code does not automatically infer compliance with the Regulations and these, as currently drafted, could be interpreted by a Court with less flexibility than contained in the Code.

We are also supportive of TPR and DWP amending the calculation of duration for deriving the point of Significant Maturity so that it is less sensitive to changes in interest rates. This would help provide stability to pension scheme journey plans and business planning

First consultation 

We were pleased to see that TPR had reflected on the feedback on the first code of consultation and made Bespoke compliance principle based and not compared against Fast Track compliance.

Covenant assessment

The Code introduces a more formulaic funding regime compared to the existing position, particularly in relation to the covenant strength assessment. We have some concerns about the level of assessment of sponsor business plans on how involved trustees should be in these plans.

For larger/multi-national groups the guidance on assessing cashflows and the value of guarantees feels over simplified. Also, how trustees should assess the value of contingent assets and allow for them within their overall approach is an area where greater clarity is required.

One concept that is formalised in the Code and highly significant to the setting of an acceptable journey plan is covenant reliability. In our view it will be difficult for trustees (or covenant advisors) to provide a single figure for this due to its subjective nature.

Therefore, we recommend TPR adopt a simpler approach and set a default value (e.g. 6 years). This would allow trustees/covenant advisers to consider whether they are comfortable that their reliability period is at least this value, which is an easier question to consider rather than what the specific reliability period is. If the answer is that the reliability period is shorter than the default, then this value should be adopted.

Equally, trustees should be able to provide evidence if they believe a longer reliability period was justified. The latter will be important in ensuring the viability of schemes with resilient sponsors and supporting robust open schemes

Other areas

In addition, we believe the following areas are worthy of consideration in refining the draft Code.

  • We would prefer to see less prescription in the draft Code around the setting of assumptions. We suggest that the assumption Appendices are moved to into the Fast Track guidance with the Code containing less detail and requiring evidence-based/consistent assumptions with an overall appropriate level of prudence.
  • TPR will have to set its preferred balance between how easy it is to comply via Fast Track and the appropriate level of tolerable risk it is willing to accept. If TPR wants to encourage schemes to adopt Fast Track, we would suggest that the level of compliance is minimised. This should come in the form of a simplified Statement of Strategy, lighter touch reporting and minimal covenant analysis requirements (as effectively the approach is covenant neutral).
  • A yield curve approach means different things to different people. For example, a yield curve approach can be a single equivalent basis derived from yield curves using sample or scheme cashflows. To provide flexibility and enhance pragmatism we would welcome clarification that advisors can use their judgement when adopting a suitable ‘yield curve’ approach.
  • As noted above it is important to reduce the burden on smaller schemes, therefore we recommend that the small scheme definition is extended in both the Code and Fast Track to capture more schemes. A scheme should be classified as small if it has 100 members or less or the asset size is less than £25M.
  • While we don’t believe the code should be expanded to try and deal with every type of scheme specific circumstance, it would be worth including a comment to say that trustees should look to apply the principles in non-standard scheme designs. Examples include hybrid arrangements (DB with a DC underpin and vice versa), cash balance, shared cost, etc.

Read Iain McLellan’s (Head of Research and Development) comments in Professional Pensions and Pensions Age.

Read our overview of the DB Funding Code Consultation here.


Image Iain McLellan

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