The perpetual wait for key elements of the new funding regime - a blessing in disguise?

I’ve uttered the word "imminent" many times to trustee boards and clients in recent years regarding the legislation and various consultations linked to the new funding and investment strategy regulations. In fact, I started teasing trustees soon after the Pension Schemes Act 2021 came into effect and more often than not, everything that promised to follow has been delayed more times than I can count. Most recently, this has been with regards to the much-anticipated final version of the defined benefit pension scheme funding code. Advisors were starting to resemble the boy who cried wolf, except instead of wolves, we’re crying "funding code”. And it has been frustrating, because each time an expected release date approaches, advisors are somewhat compelled to tee up clients and keep them as informed as we can. I’ve half-drafted many memos and client updates in anticipation of something to shout about only to put them to one side yet again, and I know I’m not the only one. 

The final straw was the dissolution of Parliament for the election in the same week as we expected the final code to be released. This means that the effective date of the new funding regime will come and go in the absence of an in-force funding code. But let’s take a step back and reflect, because hindsight, as they say, can be a wonderful thing. The overall delays in the funding and investment strategy regulations coming into force, maddening as they have been, might just be a blessing in disguise. Hear me out. 

Since the new regime was first announced, the financial markets and the pensions landscape have experienced a fair degree of both turbulence and excitement. The gilt crisis of 2022, for instance, dramatically altered the funding status of many pension schemes. Suddenly, schemes that were previously ticking along found themselves surprisingly well-funded. The Mansion House Reforms, which ultimately led to the government’s consultation on options for defined benefit pension schemes, arguably sparked a change in mindset of sponsors, trustees, and advisors. Traditionally, many pension scheme trustees would have seen buying out with an insurance company as the ultimate goal (and perhaps only choice) once affordable, marking a neat and tidy end to their journey. Now, with "run-on" emerging as a legitimate strategy, alongside the intention to remove barriers to surplus extraction, trustees have a viable alternative to consider. Superfunds and consolidation, while still novel propositions to many stakeholders, present further hitherto not contemplated options, particularly for less well funded schemes.

Ultimately, the developments as a whole have drawn attention to the various paths open to pension schemes and the importance of taking the time to consider which path is right for a particular pension scheme. Rather than rushing to offload liabilities as soon as possible, a longer-term option could turn out to be the best choice for members and sponsors alike. 

Given these seismic shifts in the pension scheme landscape and outlook, perhaps the interminable wait for the new funding regime to become effective isn’t such a bad thing. If it had come into force a couple of years ago, before these developments, the first pension schemes obliged to adhere to it may have found their chosen strategy to have become obsolete or unfavourable rather quickly. They may have felt cheated that all the options open to them were not so obvious at the time. And while a funding and investment strategy is predestined to evolve and change with experience and suitability, it would have been frustrating to find one’s out of date just so soon. I can’t rule out confirmation bias here too - which can be a stumbling block to moving to a different, more suitable path. Some schemes may also have ended up accelerating contributions that were not needed.

So while we were stuck in the waiting room for longer than expected, maybe we’re ultimately better off for it. In the end, perhaps it’s not so much about the delay itself, but about what we have done with this extra period of anticipation. The time has allowed trustees a less pressurised environment to re-evaluate their strategies, taking into account the latest market conditions and the evolving regulatory landscape. I think that we are all now better equipped to embrace the intention of the new funding and investment strategy regulations, bearing in mind the government’s ambitions where appropriate, and set the right long term strategy path for the schemes we advise.

It’s certainly been frustrating at times to be kept hanging, but it’s safe to say that I have been grateful for the additional rumination time. I’m keen to get a move on now though, so I’m off to refresh my inbox, and what do you know, the final funding code has just landed!