As the saying goes, you wait ages for a Code of Practice to be published and then two come along at once.
Following on from the publication of the General Code (which came into force on 27 March 2024), the Pensions Regulator (TPR)’s long-anticipated revised draft defined benefit (DB) funding code of practice (the Code) was laid in parliament on 29 July 2024.
If parliamentary approval is granted (typically expected to take around 40 days), the Code will replace the existing DB funding code that was introduced in 2014. It will be effective for schemes which have actuarial valuations with effective dates on or after 22 September 2024, sitting alongside the new funding and investment strategy regulations.
This new Code outlines TPR’s expectations for trustees under the updated funding regime, which requires all schemes to adopt a funding basis aimed at reducing long-term dependency on their sponsoring employers. Key aspects of the revised Code include:
- Low dependency funding basis and significant maturity: The Code provides guidance on achieving low dependency funding and determining 'significant maturity.’ TPR has not been prescriptive in its approach to the assumptions to be used for the low dependency target, and instead sets out general expectations.
- Low dependency investment allocation: The Code specifies the need for trustees to develop a strategy for investing in a low dependency allocation after their scheme reaches significant maturity. The strategy must be "highly resilient" to short-term adverse changes in market conditions.
- Recovery plan principle: The Code incorporates a new principle that any deficit must be recovered as soon as reasonably affordable.
- Employer covenant: The Code specifies two key aspects of covenant:
- covenant reliability, which refers to the period during which there is reasonable certainty regarding the availability of cash flow to support the scheme, and
- covenant longevity, which indicates how long trustees can reasonably expect the employer to be able to sustain support for the scheme. Further guidance on this is expected from TPR.
The Code also outlines specific requirements for the content that must be included in the Statement of Strategy, which must be reviewed at least every three years in conjunction with the triennial valuation. Typically, this strategy will require the agreement of both trustees and sponsors. TPR will confirm the final form of the Statement of Strategy separately.
New approach to assessing actuarial valuations
In conjunction with the new Code, in its ‘Response to Fast Track and regulatory approach consultation’ document TPR has detailed its new twin-track approach for assessing triennial valuations: 'Fast Track' and 'Bespoke'.
- Fast Track: This route is available for valuations that align with TPR's set parameters, including a low dependency funding basis of 0.5% per annum above gilt yields. It streamlines the submission process by requiring less information.
- Bespoke: This option is open to all schemes and gives trustees scope to select an approach that suits the specific circumstances of their scheme, subject to certain requirements. It involves more thorough scrutiny by TPR. However, it should not be regarded as a less favourable choice compared to Fast Track.
We can provide training and a checklist to help trustees meet the requirements of the Code and identify any gaps that need filled. If you need any help or have any questions then please contact one of our pensions team who will be happy to help.
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