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New code on scheme funding published by Pensions Regulator

The Pensions Regulator has published his eagerly anticipated new code of practice on funding defined benefit (DB) schemes. It now awaits Parliamentary approval before formally coming into force later The Pensions Regulator has published his eagerly anticipated new code of practice on funding defined benefit (DB) schemes. It now awaits Parliamentary approval before formally coming into force later this year.

The main criticism charities had of the old code was that it was too focused on the private sector and did not address questions of affordability and the assessment of employer strength (the employer covenant) from the perspective of the Third Sector. That is also a criticism that can be levelled against the new code.

The new buzz word in the revised code is "sustainable growth". This is no coincidence. One of the drivers for the new code was the announcement in the 2013 budget that the Regulator would have a new statutory objective of minimising any adverse impact of scheme funding requirements on an employer's sustainable growth plans. This sits alongside the Regulator's other objectives, which are primarily concerned with protecting members' benefits and minimising the liabilities having to be picked up by the Pension Protection Fund.

This represents a change of emphasis. For example, instead of closing funding shortfalls as soon as an employer can reasonably afford, scheme trustees are now encouraged to explore flexibilities within the scheme funding framework to ensure that the funding plan they agree minimises any adverse impact on their employer's plans for sustainable growth whilst still ensuring adequate protection for members. Trustees don't need to close the funding gap as quickly as possible if they think the employer is good for the money in the longer term and needs the funds for investment in sustainable growth. The argument is that this is consistent with protecting members' benefits because a strengthened employer is better able to support its scheme.

The code's reference to sustainable growth, as well as to dividend policy and other business decisions, is confirmation that it is written primarily from the perspective of the private, business sector. Although there is still much in it of relevance to employers and scheme trustees in the Third Sector, what the sector really wants is a code that links the more principles-based approach to scheme funding in the new code with the operating model of charities and not-for-profit employers.

The Regulator is consulting informally on what additional guidance might usefully be provided for these employers and their schemes. That guidance, if it is forthcoming, may be more practical use than the code itself for employer covenant assessments for schemes sponsored by charities.

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