The UK pension industry is divided and cautious about the potential benefits of the regulator’s proposed new DB funding code of practice.
At a recent Pension and Lifetime Saving Association session delegates were polled by Aon about how their attitude towards implementing the new funding code with any further change, in light of their experiences during 2020.
Around one in five (21 per cent) were fairly or very positive about this new code. However one in four (24 per cent) viewed it negatively and 11 per cent very negatively. The remaining 44 per cent said they were neutral on this issue.
Delegates were also asked what had happened during 2020 to the technical provisions funding level of the largest schemes they worked with. While 24 per cent of delegates had seen no change to the funding positions, 41 per cent flagged slight deterioration and 4 per cent said that it had worsened significantly A total of 29 per cent of delegates reported a slight improvement to their funding position.
Aon partner and head of UK retirement policy Matthew Arends says: “Over two-thirds of schemes had seen either no change or a worsened funding position during 2020, despite the market recovery since April.
“It is therefore probably unsurprising that 35 per cent of schemes viewed the Funding Code negatively.
“We expect that the 21 per cent who viewed the Funding Code positively probably did so due to the introduction of the concept of Fast Track compliance, a route that reduces the cost of negotiating valuations but potentially requires higher contributions. This is therefore a simplified compliance option for those who want it.”
Arends adds: “This year’s experience clearly highlights that the funding code’s objective to drive better funding levels by a set date, and driven solely by scheme maturity, may well need to be reconsidered by TPR.
“We see the relatively negative views of the funding code as being primarily down to the conditions created by the Covid-19 pandemic. But this negativity may also come from the explicit statement by TPR that it will judge bespoke compliance relative to Fast Track.
“TPR expects all schemes to reach their long-term target by the time they are ‘significantly mature,’ which rules out simply taking longer to get to the target if asset performance is set back. That was the case this year, and it has created tensions.
“Many of the schemes which had seen their funding position deteriorate slightly or considerably in 2020 could also have seen a setback to their employer’s strength of covenant. That means the risk to members’ benefits remains heightened, especially when we are approaching a time of extreme economic uncertainty.”
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