The DB funding code of practice is intended to reflect legislative changes in the Pension Schemes Act (soon to receive Royal assent) and will set out key principles which trustees should follow in carrying out scheme valuations. These include considering the long term objective (LTO) and a journey plan to achieve that LTO as the scheme matures. The second consultation is planned for the second half of 2021 once regulations are enacted under the Pension Schemes Act and will focus on the detail of the draft code.
So, how far (if at all) should trustees carrying out valuations this year take the draft code into account?
David Fairs (tPR), has confirmed that:
“Actuarial valuations only come under the new code after it’s been issued. For actuarial valuations that are being done at the moment and potentially those [conducted] in the first quarter of 2022, they are going to be done under the existing code.”
In the meantime he said that there are some aspects which trustees can work on, as some of the concepts of the new funding code are present in tPR’s funding statement. For example, it is important that trustees think about having a LTO that is agreeable with the employer, considering “the journey plan on how you are going to get to that long-term objective and think what might throw you off course and what the mitigations are to get you back on to it. All the good things about integrated risk management that we’ve been setting out in our annual funding statement are behind the code, I think trustees need to embrace that. But what we see at the Regulator is that there are some schemes that don’t really do integrated risk management that well. Part of the thinking behind a new funding code is that it forces schemes’ thinking in that way.”
What does this mean for trustees? If your scheme is carrying out a valuation now, the valuation is carried out under the existing code, but the Regulator is clear that “integrated risk management’ is a key theme to be factored into valuation discussions and scheme management generally. IRM involves examining how employer covenant, investment and funding risks relate to and are affected by each other and what do if risks materialise. Trustees should also pay close attention to the Regulator’s 2020 annual funding statement; and in our view, they should understand the ‘direction of travel’ embodied in the Pension Schemes Act.
All the good things about integrated risk management that we’ve been setting out in our annual funding statement are behind the code, I think trustees need to embrace that. [David Fairs]