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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
United Kingdom | Publication | marzo 2020
On March 3, 2020, the Pensions Regulator published the first of its two planned consultation papers on a revised DB funding regime. This first consultation focuses on its new regulatory two-way approach for valuations and the eight principles underlying the new framework offering alternative “fast track” or “bespoke” routes to schemes for compliance. This consultation closes on June 2, 2020.
The second consultation is planned for later in 2020 and will focus on the revised DB funding code itself.
The starting point for the Regulator has been the DWP’s March 2018 White Paper “Protecting DB Pension Schemes” which questioned the lack of clarity in the existing framework on how trustees set their scheme’s technical provisions and consequently decide upon any appropriate recovery plan. The intention is now for the Regulator to define the expected approach as DB schemes approach maturity. As a result, the Regulator should find it easier to make decisions regarding when to take regulatory action under the new offences regime set out in the Pensions Schemes Bill 2019-21 currently making its way through Parliament.
The Regulator has identified eight core principles which it believes should underpin all valuations. These have been based on its experience to date in reviewing thousands of valuations and bearing in mind both current and forthcoming legislation in the form of the new Pension Schemes Bill.
The principles can be summarised as set out below:
The Regulator does not intend to reintroduce a one-size-fits-all funding standard. Instead, it seeks to introduce a previously trailed two-way compliance route which will enable schemes to choose between:
It is anticipated that the twin-track approach should introduce greater clarity to trustees and employers as to why the Regulator may have concerns about their funding arrangements and what can be done to reduce such concerns. The Regulator is as yet unclear about how many schemes fall into each category but more detail on each of the approaches is set out below.
Although aspects of the eight principles above apply to trustees opting for either route, under the fast-track approach trustees would be expected to submit a valuation that is compliant with the Regulator’s measurable guidelines. Trustees could expect to have to provide less evidence and for their valuation to receive less scrutiny. The aim is that this approach will ease the process for well-managed and well-funded schemes. With the clearer expectations of fast-track, the Regulator hopes to provide an easier route to compliance for trustees of smaller schemes.
The Regulator will set a series of objective and quantitative compliance guidelines for the fast-track long-term objective. These include:
The parameters may also include some scheme-specific factors such as maturity and employer covenant strength and schemes would need to satisfy all requirements individually to be fast-track compliant.
The fast-track framework would represent a baseline of “tolerated risk” of scheme- and employer-related risks for schemes in different circumstances. However, the Regulator does not suggest that fast-track would be a risk free framework and trustees would still be expected to exercise judgment and assess and manage their own scheme- and covenant-specific risks.
If trustees can demonstrate across-the-board compliance with all aspects of the fast-track framework, the Regulator is unlikely to raise any concerns regarding the valuation. However, any deviance from the fast-track compliance elements would mean that the valuation would be treated as bespoke.
The eight principles apply to the bespoke approach as well as the fast-track system, with the difference that the boundaries outlined above for fast-track will not apply. Where trustees opt for the bespoke approach, they will submit their valuation, together with supporting evidence, explaining why and how their position differs from that of fast-track and how any additional risk is being managed.
Where trustees wish to take additional risk to that outlined in the fast-track level, or where their funding solutions do not satisfy all the fast-track guidelines, the bespoke route may be a better fit for their scheme. However, because the valuation does not then meet some or all of the fast-track criteria, bespoke arrangements are likely to receive more Regulatory scrutiny.
The Regulator emphasises that it does not expect all respondents to the consultation to answer all the questions in the 170 plus pages, but to focus on areas of their particular experience and expertise. It sees the proposed framework as striking the right balance between the security of member benefits and the costs to employers of running their DB schemes. It states that many of the principles are consistent with its messages over recent years of integrated risk management and the importance of long-term planning, and it is keen to receive input on defining “what good looks like”. The possible timeline for the implementation of the new DB scheme funding regime is outlined below.
June 2, 2020 – Current consultation closes.
Early summer 2020? – Pension Schemes Bill receives Royal Assent, following which DWP sets to work on draft secondary legislation setting out new powers for the Regulator.
Summer/Autumn 2020? – Consultation on DWP’s draft regulations.
Autumn/Winter 2020? – Regulator publishes its second consultation revealing its proposed new DB funding code.
Post second consultation – Finalised Code to be laid before Parliament for 90 days.
Around same time as Code laid – DWP Regulations laid?
Late 2021 – Regulator expects new the funding regime to come into force.
While TPR does not expect the new approach to be too onerous for schemes, there have been estimates that the proposals to curtail the lengths of recovery plans could cost companies sponsoring DB schemes as much as £5 billion. This tough line on tackling scheme deficits could see schemes with strong employer covenants being expected to bring schemes to solvency funding levels within a much shorter timeframe.
In allowing schemes to vary from the fast-track, low-risk approach to compliance, the Regulator has attempted to avoid the pitfalls of an entirely compulsory framework such as that which applied to the minimum funding requirement, which was ultimately scrapped as unworkable in 2005. However, where companies with strong covenants have sought to stretch the limits of the current regime by putting in place unreasonably long recovery periods, they may find the Regulator seeking assurance that their plans to reach future low dependency are credible.
In setting the parameters for the fast-track regime, the Regulator has sought to tread the line between it being an easily accessible route attracting most schemes and being so strict that it is rarely used. However, the choice for schemes as to which option to take may not be as binary as it first appears. On the one hand, some schemes may find it difficult to satisfy all the fast-track criteria in respect of each of the eight principles. On the other hand, where schemes opt for the bespoke route, whilst there will be flexibility for instance (as now), in putting in place a longer recovery period where there are stronger contingent assets the additional costs of evidencing compliance could outweigh the benefits.
View the DB funding consultation paper (175 pages).
View the Regulator’s quick guide – recommended for everyone (15 pages).
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