Pensions Regulator Defined Benefit Funding Code of Practice 2024

Debate between Viscount Younger of Leckie and Lord Palmer of Childs Hill

Monday 21st October 2024 Grand Committee

[Lord Palmer of Childs Hill (LD)]

My Lords, I thank the noble Lord, Lord Davies. Indeed, I thank all the speakers for the expertise gathered in this Room on what is an unlikely subject for many people.

On the DB funding code, first, with all the expertise that has been expressed—and for those reading Hansard who have no expertise—perhaps I ought to say something basic. For the record, what is a defined benefit pension? It is a type of workplace pension that guarantees you a specific income for life throughout retirement. The amount that it pays out depends on things such as your final salary, your average salary and how long you have been a member of your employer’s scheme. I know that everyone in the Room knows that, but people outside it may not.

The DB code has been many years in the making, as the noble Lord, Lord Davies, said. It sets out in detail how defined benefit pension schemes will have to approach funding in future, including things such as how quickly they must deal with any deficit that may arise. The code was arguably written in an era of deficits, whereas the majority of DB schemes are now in surplus, but I agree that you still need a set of rules for those schemes that are short of funds.

Despite all the worthy speeches, most of the code is uncontroversial, in my view, and has my general support. The response from the industry has been broadly positive; it appears to give trustees and scheme sponsors flexibility while ensuring that they carry out proper risk management as it relates to their pension products. Numerous articles have been written on it; given the length of this debate, I will not go into them in any great detail, but I highlight an article entitled “PwC Comments on The Pensions Regulator’s New Defined Benefit Funding Code of Practice” and an article in Pensions Age Magazine headed “Industry expresses ‘relief’ as TPR confirms final DB Funding Code”. So the industry and commentators have been complimentary in general terms.

However, I wish to raise some issues on which I would appreciate the Minister’s views. First, how far does the code truly accommodate the needs of remaining open DB schemes? This was a big topic of debate in the Lords during the passage of the Pension Schemes Act 2021. Does it allow them to take an appropriate level of investment risk for the long term, rather than having to go for lower-risk assets prematurely? This simply means that they cost more to run, as the noble Baroness, Lady Altmann, said in another way.

Secondly, how far does the code recognise the particular position of charities and other not-for-profit sponsors of pension schemes? Is there a risk of charities being forced to close deficits too quickly and, therefore, having to divert a loss of revenue income into the pension scheme? There would then be a risk of it appearing to donors to those charities that their money is not being used for front-line charitable purposes, thereby weakening the charities’ futures. I would appreciate the Minister’s comments on that.

Finally, I am sure the Minister has read the blog by David Fairs, who worked at the Pensions Regulator. It was headed: “At long last, new regulations fire the starting gun for the new funding regime”. He stresses the challenges and opportunities missed. He queries—and he is an expert—whether the new funding code will make a significant difference. I ask the Minister the same question.

[Viscount Younger of Leckie (Con)]

My Lords, I thank the noble Lord, Lord Davies, for giving us the opportunity to have the first pensions debate in this House since the general election. This Committee is my first experience of swapping sides with the Minister, and it gives me the opportunity to wish her well in her role with all its responsibilities, with which I am all too familiar.

This debate on the defined benefit code of practice is interesting in that, as has been said, it is not an SI but arises out of one in the form of delegated powers from the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024. It seems that every decade or so there is a requirement for a code update: there was one in 2006, leading to the current version in 2014, and now in 2024 we are debating another code of practice—number four, I believe. Updates are based on the premise that the pensions landscape changes, and of course it does, as now with the need for scrutiny of liabilities in DB schemes, the plethora of closed and maturing schemes and the need to ensure risk management, greater robustness over the longer term and optimum management of open schemes, which have been alluded to in this debate.

Ensuring that pension schemes are well managed is essential in safeguarding the incomes and welfare of pensioners. This is especially important at a time when the cost of living is high and the Government are restricting the financial support available to pensioners—more of which later. I welcome the publication of this code and its stated aim of helping trustees comply with their responsibilities under the defined benefit pension funding requirements. The focus is necessarily on supportable risk and ensuring that trustees and sponsoring employers are not caught unawares and plan well ahead, in particular where schemes are nearing maturity.

The work on the code was undertaken by the regulator under the previous Government, and I am pleased that the consultation on the code—there have actually been several, as the noble Lord, Lord Davies, and others alluded to—has been widely accepted by a broad range of stakeholders. I note that where there were concerns, such as on the need for flexible risk-taking at low dependency and not a one-size-catch-all approach, they were largely addressed and accepted in discussions with the industry.

I have listened with interest to the technical points raised by a number of noble Lords, in particular the noble Lord, Lord Davies, and I know that these points will be addressed—I say this with some relief—by the Minister. By his own admission, the noble Lord, Lord Davies, repeated some of the points made in the debate in March, such as about so-called box-ticking and the code being too prescriptive. In March he also mentioned his concern about the regulator misunderstanding its role, although I am not sure he alluded to that today.

My first question to the Minister leads on from this. It is simply: is the job done? Is the code an iterative process because we do not want another 10-year wait, or do we just accept that this is bringing it up to date and that, in effect, we wait for eight or 10 years? It does not particularly matter, I suppose.

I have some questions of my own on the code. The best-practice management of pension schemes is dependent on the effectiveness of trustees. How does the Minister regard the current landscape for recruiting trustees? There is a danger that too much guidance and steer towards adherence to codes, with the greater responsibilities attached, could act as a chilling factor.

What is her assessment about the training of trustees? This question plays into other questions, not least those of the noble Lord, Lord Davies, and the noble Baroness, Lady Drake, who quite rightly alluded to the important relationship between employers and their covenants, as well as the trustees. Who undertakes this training? This is important in assisting the chairs of trustees and, of course, the supporting employers.