![workplace-with-people-in-walking-in-blurred-motion-in-modern-office-space_AdobeStock_714071973](https://www.nortonrosefulbright.com/-/media/images/nrf/hero/workplace-with-people-in-walking-in-blurred-motion-in-modern-office-space_adobestock_714071973.jpeg?w=265&revision=757b8aa8-f74f-4e2d-9ccd-084ec5192278&revision=5250277392097387904&hash=380B464034E4102358A0D456AAB43445)
Publication
Merger law reform in Australia: What next after the Exposure Draft?
As expected, the Australian Commonwealth Treasury released an exposure draft for the proposed new Australian merger regime on 24 July 2024.
United Kingdom | Publication | February 2024
After a long wait, the final version of the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 was laid before Parliament on January 29, 2024. The Regulations are due to come into force on April 6, 2024, and will apply to defined benefit scheme valuations with effective dates on or after September 22, 2024.
The Regulations are introduced under the Pension Schemes Act 2021 and will implement major changes to the existing DB scheme specific funding requirements. They will be supported by a revised DB Funding Code from the Regulator, which is expected in May or June 2024. We also expect updated covenant guidance from the Regulator, together with new guidance on the form of the Statement of Strategy.
This briefing is an updated version of our September 2022 publication Funding Defined Benefit Pension Schemes – Proposed Funding and Investment Changes and it highlights how the final Regulations differ from the draft version. It examines the key concepts in the Regulations, and what trustees and employers should do to prepare for the new regime.
The Government and DWP’s broad objective is for schemes to set, and report on their progress towards, a funding level which reduces dependence on their sponsoring employer(s) at a future date when the scheme is mature - a “long term funding objective” (LTO). The Government’s rationale for this is to ensure that schemes are making investment decisions in a way that results in the highest probability of members receiving their pensions in full.
Since the original draft regulations were consulted on in 2022, DB schemes have been impacted by the LDI crisis and the Government has outlined its “productive finance” proposals in the Mansion House reforms. The final Regulations have been revised in the wake of these significant changes.
There are several changes in the Regulations as a result of extensive commentary from the pensions industry during the consultation:
Funding and Investment Strategy
The Regulations still require trustees to agree a funding and investment strategy (FIS) with the sponsoring employer. The FIS will detail the scheme’s LTO, and how the LTO will be achieved over the scheme’s lifespan. Trustees then consult with the employer on a regular written Statement of Strategy of their progress in achieving their FIS.
The Regulations specify the information to be covered in the Statement but the Regulator now has a discretion on the level of detail it requests in relation to the supplementary matters set out in Schedule 2. Well-funded schemes are likely to attract less attention from the Regulator.
In terms of what the Regulations say, they propose that from the point a scheme reaches significant maturity, the minimum requirement is for it to have appropriate and sufficient assets so that it is fully funded on a low dependency funding basis and invested in a low dependency investment allocation. The Regulations explain these terms as follows:
In terms of how trustees are expected to pull together these key concepts into a FIS, the Regulations indicate that trustees are to have regard to the matters and principles set out in a schedule to the Regulations and include:
Statement of Strategy
The Regulations also set out the matters the Statement of Strategy must cover, including how maturity is expected to change over time; the level of investment risk to be taken in the context of the trustees’ assessment of the strength of the employer covenant; the action trustees will take if any risks identified in the FIS materialise; how low dependency will be achieved by significant maturity; how the scheme assets are held in investments of sufficient liquidity; and any comments the employer has requested to be included.
Overall, the Statement of Strategy must clarify the risks of implementing the scheme’s FIS and the planned mitigation if those risks materialise. A Chair of trustees must sign the Statement and provide it to the Regulator “as soon as reasonably practicable” following its preparation or revision, along with the valuation to which it relates. The submission process will be detailed in the Regulator’s code.
Timing and Preparations
Trustees must have their first FIS in place within 15 months of the effective date of their first scheme valuation on or after September 22, 2024, and reviewed within 15 months of each valuation thereafter or if there is a material change in the circumstances of the scheme or employer.
Trustees need to therefore understand what is expected of them and take preparatory action. Questions to be posed now include:
Issues for employers to consider are:
Overall, trustees and employers will need to engage with their advisers to prepare for setting a scheme FIS and Statement of Strategy.
The changes made in the Regulations from the earlier draft have largely been well-received. However, there are some views that there has been a missed opportunity in not making legislative provision for “trapped surplus” at this stage, given that this is seen as a real possibility with the shorter recovery periods envisaged. Easier access to surplus funds for the sponsoring employer is seen as a priority for future legislative changes if the Government is to encourage schemes to support its productive finance agenda. The first step has been taken in the reduction of the tax payable on DB surpluses from 35 to 25 per cent with effect from April 6, 2024. We expect a consultation later this year on changes to DB surplus rules. However, further change may depend on the outcome of the election.
The Regulations make no mention of the proposed “fast track” and “bespoke” funding approaches which the Regulator first consulted on in 2020. Again, we await the new Code to see how these plans may have evolved in the intervening period and how they would work alongside the revised Regulations.
As matters stand, without the new Code in hand, trustees and employers cannot yet know the exact requirements. What is clear, is that the changes will require trustees and employers to work much more collaboratively in the future. This will apply at and between scheme valuations particularly in light of the new statutory requirements for employer covenant analysis, and generally in respect of funding and investment.
Publication
As expected, the Australian Commonwealth Treasury released an exposure draft for the proposed new Australian merger regime on 24 July 2024.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2023