UK Government finalizes pension scheme funding regulations
The Department for Work and Pensions (DWP) has officially released the long-awaited final funding and investment regulations, set to be enforced in April 2024. These regulations establish a comprehensive framework for a new scheme funding regime aimed at ensuring the long-term protection of pension scheme members.
The regulatory framework is the result of extensive policy development involving discussions, engagement, and consultations by both the DWP and the Pensions Regulator (TPR). The journey began with a green paper in 2017, evolving through productive finance consultations to address the evolving landscape of pension scheme management.
Key components of the regulations were initially presented in draft form in July 2022, outlining the requirements for defined benefit (DB) schemes in determining their funding and investment strategies. Simultaneously, TPR contributed by consulting on principles underpinning a revised DB Funding Code of Practice, offering practical guidance for trustees to comply with scheme funding requirements.
Responding to industry concerns, the DWP collaborated closely with TPR, incorporating explicit flexibilities outlined in the draft code and introducing additional changes to accommodate more scheme-specific flexibility. Notably, the regulations clarify that there are no constraints on actual investments, allowing even mature schemes to invest across a diverse range of assets.
The regulations also emphasize the consideration of sustainable growth in sponsoring employers' businesses alongside affordability principles. Furthermore, open schemes can account for new entrants and future accruals when determining their significant maturity, streamlining long-term planning and implementation.
Addressing risk considerations, the DWP noted that 70–75% of schemes align with TPR's proposed Fast Track investment stress parameter. This opens the door for higher risk-taking, provided trustees can justify their approach, signaling a balanced approach that respects fiduciary duties.
Minister for Pensions, Paul Maynard, stated, "It was never our intention to bear down on risk-taking across the board. Rather, it was to make funding standards clearer and to promote planning for the long term." He highlighted the changes made to accommodate appropriate risk-taking, support trustees in adapting to changing circumstances, and ultimately ensure the regulations contribute to the long-term well-being of pension scheme members.
Maynard emphasized that the regulations provide a clear framework for sponsors and trustees to work collaboratively, especially in a landscape where most schemes are closed. The regulations aim to foster responsible planning for the future, embed existing good practices, and enable TPR to intervene more effectively if needed.
