Further to the Pension Regulator’s (tPR) interim response and the recent experience of UK pension schemes and their sponsors in dealing with the exceptional disruption from the Covid crisis, we believe it is a good point to reprise our views on the key headlines of the Funding Code proposals from a covenant perspective as the response is developed during 2021.

We hope that the resultant revised Funding Code will present a lasting guidance framework, sensitive to the ever changing economic back drop on a scheme specific basis, in seeking to secure an efficient but robust basis for scheme funding. Key points from the initial consultation included:

Fast Track: we acknowledge the attractions for some in securing a funding basis for minimum tPR intervention and expense, e.g for smaller schemes and very substantial sponsors. We would expect the Fast Track standard to apply to schemes that are virtually self-sufficient, if the catchment is too widely drawn we fear it will not be sustained.

Bespoke: this should be given equal validity as an approach, independent of Fast Track. This approach will apply to the vast majority of substantial pension schemes and will need to provide a framework for the efficient utilisation of covenant in funding such schemes.
Integrated and Holistic approach: this is likely to be the most efficient and economically rational basis on which to set scheme funding. Failure to take full account of covenant will risk jeopardising sponsor buy-in and scheme security.

The Long Term Funding Plan: should be scheme specific and dependent upon covenant, scheme maturity and funding status if it is to stand the test of time.

Affordabiity: and covenant strength should be viewed in balance, it will be counter-productive to disincentivise the providers of strong covenants and those with substantial affordability from making these assets available in support of their pension schemes.

Visibility: of covenant has again to be a scheme specific item, it will be economically unrealistic to be overly formulaic in this consideration and will also disincentivise sponsors who provide strong covenants and affordability in failing to recognise differing longevity.

Equitability: we would like to see a framework which on the one hand recognises the schemes standing as a creditor, particularly in distressed situations, but which continues to recognise that risk capital must equally benefit in ongoing situations, in proportion to the risk taken where appropriate.

Insolvency: we agree that a Scheme’s insolvency position should be protected, all too often schemes find themselves a relatively weak creditor in distressed situations. We would be pleased to see a harmonisation of treatment between pensions and insolvency legislation and regulation to set the guidance for the future.

Overall, we endorse the continued development of a helpful guidance framework to UK pension trustees but we would strongly discourage seeking to over-standardise the Scheme specific model given all the dangers of driving unintended and uneconomic consequences for Schemes and Sponsors alike.

For further information or to discuss your scheme’s position, please do get in touch:

Paul Jameson, Managing Partner – 020 7337 4142 (pjameson@penfida.co.uk)
Trevor Civval, Senior Partner – 020 7337 4110 (tcivval@penfida.co.uk)
Arabella Slinger, Senior Partner – 020 7337 4115 (aslinger@penfida.co.uk)