New DB code focuses on employer covenant

Understanding the strength of the employer covenant has been placed at the heart of the new code of practice for DB schemes published by the Pensions Regulator today.

Entitled Funding DB Benefits, the code has been described as part of a significant change in the regulator’s approach to DB schemes. TPR says it recognises that a strong ongoing employer alongside an appropriate funding plan provides the best support for a well-governed scheme.

The code urges trustees and employers to work in a collaborative and transparent way to consider the impact scheme funding proposals may have on the employer’s plans for sustainable business growth. It also recognises that risk is inherent in pension schemes and expects trustees to identify and manage the key risk areas of investment, funding and employer covenant.

The code, which was subject to several months of extensive consultation, was laid before Parliament today and is expected to come into force in the next few months.

TPR interim chief executive Stephen Soper says: “The revised DB funding code and strategy set out our expectations of trustees, and how we will balance our current member and PPF protection objectives with our new objective to minimise any adverse impact on the sustainable growth of an employer.

“In the vast majority of circumstances, trustees and employers should be able to agree funding plans that both benefit the business and strengthen the scheme’s long term security – but this can only be achieved by employers and trustees working openly and collaboratively.”

Tony Hobman, chairman of the Advisory Board at investment bank Lincoln International and former chief executive of TPR says: “More than ever the new code places evaluation of covenant risk as having equal importance alongside assessment of actuarial and investment risks.  Trustees will increasingly need to question whether the allocation of their advisory budgets reflects this reality.”

Towers Watson senior consultant Graham McLean says: “As with most of the regulator’s statements, there is something for the ‘pension deficit hawks’ and something for the ‘doves’. The regulator does not want to be seen as a brake on economic recovery, but nor does it want to be blamed for not getting the money out of employers while it had the chance. 

“The government has told the regulator to ‘minimise any adverse impact on the sustainable growth of an employer’*. Now, the regulator has copied and pasted this phrase when setting out what it expects trustees to help deliver – even though trustees’ duties to scheme members have not been watered down. This is the main change from the draft Code that was published in November and looks like a lobbying victory for employers – though the regulator still emphasises that trustees need to understand and manage risk.

“For many schemes, the goalposts may not have moved very much in practice as funding has always been about balance. Where the employer feels that investing in the business is a much better use for the cash and the trustees take a different view, the regulator’s new objective may embolden scheme sponsors to stand their ground. However, the regulator has also hinted that many employers can afford to spend more on tackling their pension deficits than they are currently doing.  It wants to keep employers guessing about how it would act if push came to shove and not encourage too much intransigence.”