Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024

Lord Davies of Brixton Excerpts

Tuesday 26th March 2024 Grand Committee

[Baroness Drake (Lab)]

I thank the Minister for the clarity of his presentation—this is a complex set of regulations—and for the briefing session that he arranged for Peers, where I was able to ask quite a lot of questions. I support these regulations but I want to take this opportunity to ask three questions.

The regulations were preceded by a government consultation on an original draft, which was amended post the LDI crisis and in the wake of the Mansion House productive finance proposals. Importantly, these regulations remove an uncertainty as to whether the DWP would qualify a trustee’s independence to make investment decisions as they make it clear that trustees will retain the power to decide how to invest the scheme’s assets. That is welcome; otherwise, it would have significantly weakened the trustee’s powers to protect scheme members. Is not intervening on a trustee’s independence to make investment decisions now settled policy? Also, is any consideration being given to granting additional powers to the Pensions Regulator to override investment decisions when it is oversighting a scheme’s funding and investment strategy?

Secondly, the regulations now allow greater flexibility in investments and risk-taking than was originally proposed in the first draft, were it supportable. The DWP has made amendments to avoid, to use the Government’s own phrase, things that “inadvertently drive reckless prudence” —that sounds like an oxymoron—“and inappropriate risk aversion”. As the Minister said, it is now explicit that open schemes can take account of new entrants and future accrual when determining when the scheme will reach significant maturity; this gives them greater scope for scheme-specific flexibility.

However, I note that these regulations also no longer require schemes of significant maturity that are making low-dependency investment allocation broadly to match cash flow from investment with schemes’ liabilities. The Government have made it clear that schemes can invest a reasonable amount in a wide range of assets beyond government and corporate bonds, even after significant maturity has been reached—for example, when the scheme’s years to duration of liabilities is around only five to 15. The DWP has explicitly removed the original draft Regulation 5(2)(a), which required in schemes of significant maturity that assets be invested in such a way that cash flow from investments broadly matched the payment of pensions under the scheme.

Why, when a scheme has reached significant maturity, would retaining the requirement that assets be invested in such a way that cash flow from the investments broadly matches the payment of pensions be considered “reckless prudence” or “inappropriate risk aversion”—the premise on which the original draft Regulation 5(2)(a) was withdrawn? When a scheme is in significant maturity, you need prudence and risk aversion because of the need for cash flow. In fact, in many closed DC schemes, the alignment of employers’ desire to remove DB liabilities and volatility from their balance sheets with trustees’ desire to protect benefits over the long term is increasingly leading to investments held broadly matching liabilities, as well as to consideration of a path to buy- out and buy-in for many schemes. It is rather rowing against what is happening in many instances. I fear that greater flexibility of access to surplus may not provide a sufficient incentive for schemes to change their course.

This is my third and final point. The requirement to assess the current and future development and resilience of the employer covenant is now on a legal basis and has to be embedded in the funding and investment strategy agreed by employers and trustees, which is welcome. It reflects the increasing importance given to covenants by trustees but the assessment of an employer covenant can be contested ground between employer and trustee, particularly where there is a question of whether there has been a material change to the strength of the employer covenant. Given this novel legal territory, which is of itself welcome, what powers does the regulator have to address such disagreements of view between the trustee and employer on the covenant, given that they have to agree them in order to proceed with a funding and investment strategy? How, if there are disagreements—and there could well be—will the regulator address those?

[Lord Davies of Brixton (Lab)]

I need to tell the Committee that I have an interest to declare: I am a fellow of the Institute of Actuaries. However, I should add—with some emphasis—that nothing of what I will say subsequently must be regarded as actuarial advice. It might sound like actuarial advice but I assure noble Lords that it is not. I speak from my experience as a scheme actuary having undertaken scheme valuations, including those under the TPR or previous iterations of where we are.

Unfortunately, I was unable to attend the briefing session due to other business in the House. It might have been better if I had attended because I have reservations about these regulations. They are going to go through and be implemented but, in expressing some doubts, I trust that it will affect the environment in which they are implemented.

In this context, we have to acknowledge the report published today by the House of Commons Work and Pensions Committee—Defined Benefit Pension Scheme, its third report of the 2023-24 Session—which comments in some detail on the role and functioning of the TPR. I want to take this opportunity to highlight some of the report, in which doubts are expressed about the way the TPR operates. For example, Mary Starks undertook an independent review of the TPR and said:

“TPR’s statutory objective to minimise calls on the PPF may drive it to be overly risk averse, particularly given the PPF’s strong funding position”.


I will return to that.

Other comments are that the TPR’s objectives have not changed to reflect the significant changes that there have been in the defined benefit landscape. The concept of excessive prudence is widely held within the pensions industry. The PLSA, the Pensions and Lifetime Savings Association, says that

“it would be helpful to give TPR a greater focus on member outcomes as a whole”,

while the Railways Pension Scheme trustee corporation suggested that an objective should be made explicitly to

“protect and promote the provision of past and future service benefits under occupational pension schemes of, or in respect of, members of such schemes”.

So there is a significant train of thought coming from the industry that the TPR has failed to acknowledge its role in pension provision.

A particular problem highlighted in the first comment is the position of the PPF, the Pension Protection Fund. In giving evidence to the Select Committee, its chief executive, Oliver Morley, said that the objective of the TPR to protect the PPF was

“looking a bit anachronistic now, given the scale of the reserves and the funding level”.

I am not asking the Committee to accept or endorse these comments at the moment but, at the very least, they emphasise that the role of the TPR is a matter of detailed discussion. The regulations before us are firmly within a concept of its role, which many commentators now say is outdated. I have held this view for some time; it is good to see that it is now accepted more widely.

This was the conclusion of the Select Committee:

“TPR’s approach to scheme funding has been driven by its objective to protect the PPF. We agree with those who told us that the objective now looks redundant, given the PPF has £12 billion in reserves”.


As I said, this is at the very least an issue that should be confronted, but it is not confronted by the regulations before us. The regulations are patently too prescriptive. The details that they require are not directed at the objective of protecting members’ benefits but are about establishing a system where box-ticking will take priority over the longer term and broader interests of scheme members.

I have also argued for some time that the TPR misunderstands its role. There is a sort of assumption in its thinking that the calculation of technical provisions represents the best valuation basis. New readers may well find that this is getting into deep water but the point is that the actuary who undertakes the valuation at the request of the trustees must comply with the appropriate professional standard: Technical Actuarial Standard 300. This is the latest version, coming into effect in April.

It is notable that these requirements, which any actuary valuing the solvency of a pension fund should follow, do not mention technical provisions. In essence, the technical provisions are there to trigger action by the regulator; they are not there to substitute for the scheme actuary’s solvency valuation. We have what is in effect a dual basis. The scheme actuary working for the trustees will advise what they believe to be the appropriate contribution rate. Parallel to that, there is the system of technical provisions that, if triggered, require a separate valuation to be undertaken to calculate the recovery plan.

They are quite separate operations but the TPR consistently confuses the two. The end result is that, by overemphasising the role of technical provisions, schemes are being forced into this problem of excessive care, or excessive protection, of the members. It is not at all clear to me that this bureaucratic overweight on the operation of pension schemes ultimately favours the members in any way. In effect, it forces schemes—LPI is just one example—to invest in gilts, which is bad for members; there is no question about that. It is good for the Pension Protection Fund, and good for a Government who are concerned about being held up as not caring about the protection of members, but members’ benefits are drawn from the scheme so the scheme should be funded in accordance with the actuarial solvency standards, as set out by the Financial Reporting Council.