On December 16, 2022, the Regulator published its second consultation on the draft DB Funding Code, with a view to laying it before Parliament in summer 2023, so that it can come into force in October 2023. The 200-page pack on the 14-week consultation ends on March 24, 2023 and explains how the Regulator will interpret the legislation and how it will help trustees meet the DB funding rules set out by the Government. A separate consultation document on Fast Track and the twin track regulatory approach are published alongside the draft Code. The Regulator has also included its response to the first consultation.

 

In a blog published on December 13, 2022, the Regulator confirmed that the new DB Funding Code will be forward-looking, so only valuations carried out under the revised legislation will be affected. Trustees currently working on a valuation will be judged against the existing legislation and Code. 

 

The Regulator urges as many in the pensions industry as possible to respond to the consultations.

 

 

There had been a suggestion that the consultation might be postponed following a request from the Work and Pensions Committee (WPC) on December 7, 2022. This requested that the consultation reflects WPC’s findings of its LDI investments inquiry. The Regulator said that delaying the plan to consult would have a “significant impact” on the timings of the new Code, effectively pushing it back from October 2023 to October 2024. However, it acknowledged the WPC’s concerns and said it would consider whether a further consultation is required if fundamental concerns around the framework of the Code are raised during the current consultation.

 

 

Speaking at a webinar on December 13, 2022, David Fairs confirmed that the Regulator’s views on Fast Track have changed, as this regime will now act only as a filtering mechanism for the Regulator’s assessment of actuarial valuations, without being in the Code itself. If scheme valuations meet the Fast Track conditions, Fairs confirmed the Regulator would be unlikely to take action. 

The three-step filtering mechanism will now include technical provisions, the PPF’s investment stress test and a capped recovery plan length – but not employer covenant. The Regulator is removing covenant grades 1-4 from the Fast Track regime.  However, there will be details in the draft Code on how trustees should examine covenant, and the Regulator will publish updated covenant guidance in 2023.  

 

Within Fast Track, the Regulator will look at technical provisions as a ratio of low dependency liabilities, which would need to be 100 per cent at the point of significant maturity, most likely applying a discount rate of gilts + 0.5 per cent. As a result of feedback from the last consultation, Fairs confirmed that the Regulator would prescribe some financial assumptions, while others will be scheme specific.  He also noted that the Regulator has “dialled down” the level of leverage in LDI that it will deem appropriate in Fast Track. The third element in Fast Track is the recovery plan period – which the Regulator said “has to be below a certain time”, likely six years or less before significant maturity and three years or less if the scheme is considered significantly mature.

 

 

Fairs also reassured trustees that significantly mature schemes will still be able to invest in growth assets, rejecting accusations following the gilts crisis that regulatory policy was ‘herding’ schemes into bonds, making them more vulnerable to shocks in these markets.  That was not the way the Regulator had interpreted it in the Code. While schemes can invest in bonds, property and infrastructure were also acceptable, and even at the point of significant maturity, the Regulator thinks it is still feasible to have up to 20-30 per cent in growth assets, although the risk would need to be hedged so as not to undermine the cash flow and resilience principle. 

 

Unusually, the draft Code will be published before the DWP funding regulations have been finalised. The Regulator is keen to start schemes off using the new Code, even though it could change if the regulations are subsequently tweaked. The new Code is expected to apply to valuations after October 2023, which is when the Regulator hopes it will come into force.