XPS Pensions Group warns mature schemes could see deficits double without a transition period under new Fast Track funding rules
XPS Pensions Group has responded to the Pensions Regulator’s consultation on its proposed new funding rules. XPS is supportive of the principles proposed to regulate the expected changes to Government rules on long-term funding strategies for pension schemes. Having a long-term strategy that reflects the circumstances of a scheme and its employer will help to improve member security and provide more certainty to both employers and trustees. Indeed, some schemes may find the principles set out in the consultation helpful for current valuations in difficult circumstances, even before the new funding rules are introduced.
We understand the use of a Fast Track approach, i.e. a set of guidelines which, if followed, will lead to minimal regulatory scrutiny for trustees submitting valuations. We are encouraged that a Bespoke approach will be possible, retaining the flexibilities that are a feature of the current system. However, we believe two key additions are needed to the Pensions Regulator’s proposals, one each for the Fast Track and Bespoke approaches.
The Fast Track approach should have a transition period for mature schemes to allow them to benefit from the advantages of the Fast Track approach from day one, including lower fees and increased regulatory efficiency. Commenting Stephanie Cole, Senior Consultant at XPS Pensions, said “The proposed framework will require schemes to be fully funded against a long-term objective by the time they are significantly mature. There are a number of schemes already at this point. Despite being prudently funded now, these schemes could see deficits increase by 50% under the new proposals (or even double at the top end of targets in the consultation). At the same time, such schemes may need to undertake substantive de-risking exercises to ensure compliance, potentially forcing them into selling assets at a time of market uncertainty”. Stephanie added “We think some schemes in this position, especially smaller schemes, should still have the option to take advantage of the benefits offered by the Fast Track approach. The best way to resolve this would be to introduce a minimum transition period of six years before schemes’ funding targets must be set at the new long-term objective.”
XPS also believes that a different approach may be needed for how the Pensions Regulator will assess schemes using the Bespoke route. Current proposals link the assessment of Bespoke approaches too closely to Fast Track, potentially denying true flexibility. Under Government proposals trustees will have to prepare a statement of strategy which is directly relevant to their scheme, employer and funding approach. XPS suggests that the Pensions Regulator initially reviews Bespoke valuations using only the work already done by trustees and employers to develop their statement of strategy (referred to as the new DB chair’s statement). Whilst understanding risk is a crucial part of this statement, we do not think that risk should have to be assessed relative to the Fast Track benchmark. Stephanie Cole commented “We don’t think trustees who follow a Bespoke route should have to carry out a separate piece of work to reconcile all parts of their approach to the Fast Track standard. We believe this would add unnecessary cost and isn’t appropriate given the wide range of potential Bespoke approaches that could be appropriate.”