TPR's new defined benefit funding code

The Pension Regulator's (TPR's) new draft Defined Benefit Funding Code was laid in parliament on 29 July 2024, setting out their expectations on compliance with the Funding and Investment Strategy Regulations for trustees, sponsoring employers and advisers. The Code replaces the existing DB Funding Code for valuations with effective dates on or after 22 September 2024, although the Code is not expected to come into force formally until November 2024.

The Code is the final piece of the new funding regime, together with the amendments made to the Pensions Act 2004 by the Pension Schemes Act 2021, the 2024 Funding and Investment Strategy Regulations and the amended 2005 Scheme Funding Regulations. The Code's intention is to provide practical guidance on compliance with the legislation, although it does not cover all aspects of pensions legislation.

Schemes in scope

The Code is for defined benefit, trust-based occupational pension schemes and it is primarily aimed at trustees and sponsoring employers with some elements directed to actuaries or providing useful for other professional advisers, particularly covenant advisers. The Code is relevant UK wide and includes specific references to the corresponding legislation in Northern Ireland.

Essentials points to note

• All schemes in scope must develop a formal "funding and investment strategy" which is a formal journey plan, likely agreed between the Trustees and Sponsor, targeting de-risking and full funding on a "low-risk" basis.
• This "low-risk" basis must be achieved by the time the scheme is "significantly mature", which is defined as when the scheme has an actuarial duration of 10 years, and would generally mean that the vast majority of the membership are pensioner members.
• The risk in the scheme must be supported, in a proportionate way, by employer covenant strength and the Code has been updated to align with the new Regulations and sets out how TPR expects trustees to assess the covenant.
• There are two routes for the Pension Regulator to assess valuations, fast track and bespoke. TPR estimates that as of March 2023, around 60% of schemes will meet the tests for the fast-track approach, and a further fifth could meet the tests with no cost changes to their funding approach.
• If there is a deficit, trustees must follow the overriding principle that steps must be taken to recover deficits as soon as the employer can reasonably afford.
• A number of formal documents will be required, including a statement of strategy which will be agreed between trustees and sponsors and will then be reviewed, at minimum, every three years alongside the valuation.

Twin track regulatory approach

As mentioned above, TPR are adopting a twin track approach to assessing DB scheme valuations. The fast track approach acts as a 'filter' for the TPR assessment of actuarial valuations which have been submitted to the Regulator. If that valuation meets a number of tests, the Regulator will be less likely to require trustee engagement or further assessment. A bespoke approach requires additional trustee input but allows more scheme-specific flexibility.

We will provide an update once the Pensions Regulator issues the Code in its final form. If you would like to discuss anything raised in this blog in more detail in the meantime, please get in touch with a member of the pensions team or your usual Brodies contact.