DWP publishes its consultation response on the DB Funding and Investment Regulations

On January 29, 2024, the DWP published its long-awaited consultation response to the 2022 consultation on the Occupational Pension Scheme (Funding and Investment Strategy and Amendment) Regulations 2024, together with the final draft version of the Regulations.

The previous draft of the Regulations, consulted on in 2022, had been criticised by many in the pensions industry as highlighting a mismatch between the Government and the Regulator in their respective approaches to scheme investment strategy. With the improved funding levels seen in most DB schemes over the past 18 months, together with the Mansion House proposals for greater investment in productive finance, the aim is now for the revised Regulations to offer more investment flexibility, while balancing employer affordability and benefit security for members.

The new Regulations clarify that:

• Open DB schemes can take account of new members and future accrual when considering their journey plan.
• An appropriate level of investment risk may be taken when supported by the employer covenant.
• As regards the appropriateness of a recovery plan, account is taken of both affordability for the employer and investment in the sustainable growth of the employer’s business.
• The Regulator has discretion to request less detailed information in some cases, depending on the circumstances of the scheme, which should reduce administration.

The draft Regulations are less restrictive than the former version in that they no longer force all schemes into an eventual low-risk investment strategy. However, with the real possibility of generating a scheme surplus with greater investment flexibility, there is a higher risk of trapped surplus. Many consider easier access to surplus to be a priority area 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.

The DWP has also confirmed that the Regulator will reconsider its fast track parameters in light of the consultation responses and the changes in market conditions since the original analysis was undertaken. Any changes will be published alongside the final revised DB Funding Code.

The Regulations are due to come into force from April 2024, following parliamentary approval. They are expected to apply to scheme valuations dated from September 22, 2024. Our updated briefing on the amended Regulations will be published soon.