The Pension Regulator's new Code of Practice on funding defined benefits (the Code) was laid before Parliament on 10 June and will formally come into force 40 sitting parliamentary days after that (sometime in the Autumn). There is no change to the legal requirements governing defined benefits funding, just a refocussing of the Regulator's approach.
The background to the Code is the Regulator's new statutory objective "to minimise any adverse impact on the sustainable growth of the employer". It encourages collaborative working between the employer and trustees to reach an "appropriate scheme funding outcome that reflects a reasonable balance between the need to pay the promised benefits and minimising any adverse impact on an employer's sustainable growth". The Code recognises that trustees may take some risk to achieve their objectives – but they should understand and manage that risk effectively. Trustees should take a proportionate approach, based on the size and funding level of the scheme, complexity of investments, employer covenant and potential costs and benefits.
The Code contains nine principles:
| Working collaboratively | Trustees and employers should work together in an open and transparent manner to reach funding solutions that recognise the needs of the scheme and the employer's plans for sustainable growth. |
| Managing risk | Trustees should implement an approach which integrates the management of employer covenant, investment and funding risks; identifying, assessing, monitoring and addressing those risks effectively. |
| Taking risk | Before trustees take funding or investment risk they should, in discussion with the employer, establish the employer's risk tolerance and assess the employer's ability to address a range of likely adverse outcomes over an appropriate period. |
| Taking a long-term view | Trustees' decisions should be consistent with their long-term funding and investment targets and their view of the employer covenant. |
| Proportionality | Trustees should act proportionately in carrying out their functions given their scheme's size, complexity and level of risk. |
| Balance | Trustees should seek an appropriate funding outcome that reflects a reasonable balance between the need to pay promised benefits and minimising any adverse impact on the employer's sustainable growth. |
| Well governed | Trustees should adopt good governance standards in relation to the scheme's funding. |
| Fair treatment | Trustees should seek to ensure that the scheme is treated fairly amongst competing demands on the employer in a manner consistent with its equivalent creditor status. |
| Reaching funding targets | Having agreed an appropriate funding target, trustees should agree funding to eliminate any deficit over an appropriate period. |
The Code covers three main areas of risk: employer, investment and funding. Trustees should understand the risks in these areas and monitor key indicators so they can make adjustments to preserve the balance between them. For example, where the employer covenant is strong, trustees may be comfortable operating a more risky investment strategy; should the covenant weaken then the investment strategy may need revising. The Regulator also emphasises the importance of trustees having a contingency strategy to deal with a range of likely adverse events (such as employer insolvency).
The new Code and accompanying policy statement and guidance can be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
