Supportive of direction of travel

The draft Regulations are heading in the right direction in seeking to support trustees and employers in planning their scheme funding over the longer term and we are supportive of the intention to improve risk management through covenant-driven investment and funding strategies and a long-term objective of reducing reliance on covenant.

Meaningful assessment of covenant fundamental

As part of any shift to longer-term planning, a clear understanding of how covenant can support risk in the near term and how covenant may evolve over time needs to be a fundamental input into a covenant-driven journey plan.

While we hope that further guidance on this interaction will be set out in the Funding Code of Practice, the draft Regulations represent a good opportunity for schemes and sponsors to engage on managing pensions risks.

To inform those conversations, our journey plan methodology is designed to support trustees in their strategic journey plan thinking and, by incorporating assessments of Affordability, Visibility and Reliability, provides an understanding of risk and risk appetite over both short and longer-term time horizons.

Potential unintended consequences

We do, however, share some of the industry’s concerns regarding the potential unintended consequences of the draft Regulations, in particular:

• The formalisation of an overly-simplistic and restrictive definition of covenant;
• Dissuading investment in sustainable growth / pushing employers into stress or distress through unaffordable contributions;
• Schemes reducing prudence or extending covenant reliance; and
• Focussing on low-dependency at significant maturity as the “end point”

Many of these unintended consequences could be addressed by the Regulations focusing on principles, with TPR responsible for setting out the practical detail and application of the “comply or explain” approach already communicated as part of the upcoming Funding Code. Our understanding is that well-run schemes, making sensible funding and investment decisions are not expected to have to make big changes.