New code on funding for defined benefits - growth for scheme & employer

On 10 June 2014 the Pensions Regulator issued a new defined benefit funding code of practice along with a statement of its strategy for the regulation of defined benefit schemes. 

The Code demonstrates the Regulator’s new objective in relation to defined benefit schemes which is to minimise adverse impact on employers’ sustainable growth. It sets out their expectations for trustees to strike a balance between the need to pay promised benefits and to minimise any adverse impact on an employer’s sustainable business growth.

One of the key features of the Code is the emphasis on the need for trustees and employers to work together in a collaborative and transparent way to consider the impact that different funding options may have.  Employers should consider the needs of the scheme, whilst trustees are to recognise the employer’s plans for sustainable growth. If they can work together in this way it is hoped that they can agree on successful funding plans for their scheme. Any approach taken should be proportionate to the size of the scheme and risks involved.

The Code recognises the inevitable existence of risk but addresses the fact that trustees should identify and seek to understand these risks so they can be managed appropriately. In doing this the trustees should make an assessment of the risks, the possible consequences of these for the employer and the capability of the employer to handle the impact of such risks.  Trustees are required to take an integrated approach, considering the interaction of employer covenant, investment risks and funding assumptions.

Trustees are encouraged to keep the employer informed in relation to any developments of the trustees’ investment strategy, helping to improve the employer’s understanding of the implications for its own business growth and the scheme. Any risk taken should be supported by the employer covenant. Trustees should be aware of any possible changes to the employer covenant in the future and how this will affect the employer’s ability to support the scheme.

The updated code is intended to ensure that the funding regime for defined benefit pension schemes does not restrict the employer’s sustainable business growth, recognising the important combination of both a strong ongoing employer and an appropriate funding plan for the success.

Author: Maureen Burns

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.