TPR's revised funding code of practice

Published by Nick Griggs on

The Pensions Regulator (TPR) has today published its revised code of practice on pension scheme funding.  It’s good to see that TPR has made some real improvements in response to the consultation.  It has taken steps to make clear the areas where a proportionate approach is expected, and has clarified certain points that will help to avoid trustees feeling required to go beyond the level of negotiations with employers that TPR actually intends.

TPR’s risk indicator model has been flagged as an area for further development, so will not be introduced in the transparent form originally intended.

One of the most important changes for employers is the re-wording of the requirement to eliminate deficits “as quickly as the employer can reasonably afford” to instead consider the appropriate period in which to do so in view of the risks to the scheme and impact on the employer.  TPR says this is not a change of policy, rather a clarification of their true stance.  It is very easy to see how trustees could have felt under pressure to negotiate the shortest possible recovery period under the original wording, so this clarification will be greatly appreciated by employers.

Employers will also appreciate the watering-down of wording that appeared to require trustees to scrutinise the employer’s dividend policy against the impact on covenant and the possible alternative use of part of those payments as contributions to the scheme.  TPR has now clarified that such scrutiny should only come into play when the covenant is known to be constrained, or dividends are exceptionally large or paid at an unusual time. This will avoid employers being drawn into unnecessary discussions with trustees around their dividend policies, without detracting from the fact that employers must consider scheme funding requirements (alongside other creditors) when planning dividends.

A third point of concern for employers is knowing whether TPR is likely to intervene in their scheme funding decisions.  The 'Balanced Funding Output' (BFO) was intended to be quite transparent and led to concerns that some employers would treat this as a boundary that they could push right up to.  The model has been renamed the 'Funding Risk Indicator' (FRI) and will not be published in any detail. TPR has also clarified that its use will be just one of a broad range of risk indicators for case selection.  We therefore expect TPR’s risk indicators to be of little interest to employers, which is indeed TPR’s intention for the time being.