TPR’s draft Funding Code

What are the key takeaways and can you be doing anything?

Consistent with the draft regulations published by DWP, TPR is putting covenant at the heart of setting the level of supportable risk in a journey plan, and the period over which that risk can be taken. While certain points of detail may change, the broad principles are expected to remain consistent. As with all material regulatory changes, we would recommend reaching out to advisers to understand the key details. Trustee training sessions can be an excellent tool to bring everyone up to speed together.

Covenant is at the heart of journey planning

The Draft Funding Code sets out a funding regime broadly split into two important stages – long-term planning and triennial valuations.

As a starting point, trustees are expected to satisfy themselves that the risks inherent in a journey plan are supportable by the strength of the employer covenant. By considering both the likelihood and impact of covenant risks crystallising, as well as the ability and time period over which the employer could repair any resulting deficit.

Action: Further covenant guidance will be coming in 2023. We encourage trustees to start thinking about covenant as the underpin for scheme risks over a journey plan, rather than just a point-in-time rating.

Low Dependency is not the same as “no dependency”

Low Dependency investment and funding principles are defined by the Draft Funding Code such that a need to call on a sponsor for contributions is unlikely. But there remains scope for risk. Employer covenant remains the ultimate underpin for scheme risks. While a solvent employer is needed to ensure members receive their benefits in full, there is a degree of covenant reliance.

Action: Trustees should consider plausible downside scenarios that may lead to members suffering a shortfall. And continue to think beyond the Low Dependency basis to their end-game.

Covenant assessment is still required even if a scheme is Fast Track compliant

Covenant has been excluded as a Fast Track metric for practical reasons, including the fact that covenant ratings are relatively subjective. Analysis by TPR suggests a current lack of correlation between covenant ratings and valuation assumptions.

TPR has been clear that Fast Track is not a legislative tool. Nor does it represent the “gold standard”; it is a means to proportionately filter valuations on a risk basis. All trustees are expected to evaluate covenant in accordance with the Draft Regulations and Funding Code, regardless of whether they meet Fast Track requirements, to ensure scheme risks are supportable.

Action: Trustees should continue to consider their specific circumstances when undertaking valuations. Particularly so in light of the legislative requirement to set out these considerations within the Statement of Strategy.

Read the full Covenant Quarterly Q1 2023 which also includes the following articles:

• Datawatch: Gilt yields
• Ask the Analyst: How should covenant be linked to investment strategy?
• Regulatory developments: Solvency II insurance regulatory reform

For more information contact Chris Heritage, Director