TPR re-examines duration as measure for scheme maturity
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The Pensions Regulator is reconsidering if duration is the best way to measure scheme maturity as proposed in the government’s defined benefit funding consultation. The potential change of heart comes after spiking gilt yields have led to jumps in the maturity of pension schemes, while also improving their funding position.
In funding regulations being consulted on until 17 October, the Department for Work and Pensions will expect schemes to have low dependency on their sponsor by the time they reach “significant maturity”, suggested by DWP to be 12 years, and proposes to take the duration of liabilities as the way to measure this.
Duration was one of four methods to measure scheme maturity that the Pensions Regulator looked at in its first DB code consultation in March 2020.
However, the measure’s sensitivity to interest rate moves means the regulator is looking again at whether duration should be picked.
"From our first consultation we were thinking that duration might be a good measure of maturity, and now obviously we are having to reconsider that and think about it again given the events of the last few days,” said David Fairs, TPR’s director of regulatory policy, analysis and advice, speaking at the Pensions and Lifetime Savings Association’s Annual Conference in Liverpool on Wednesday.
Fairs highlighted that although the rise in interest rates means schemes’ maturity will have increased suddenly, schemes have also shrunk. “Though duration has come closer, the liabilities have come down considerably... There are self-compensating factors in that,” said Fairs but added that it was nonetheless “something we need some time to reflect on”.
The other measures TPR considered in 2020 were:
- the proportion of remaining cashflows relating to pensioner members;
- the proportion of scheme assets or liabilities paid as benefits; and
- the proportion of liabilities that relate to pensioner members.
Fairs said pensioners in a scheme need a high degree of comfort that the scheme is “properly funded”, not reliant on the employer or taking an investment gamble.
The crisis in gilts markets has surfaced other questions about the future funding framework, notably about schemes’ investments. If the new funding rules lead most or all DB schemes to invest ever more in gilts, concentration could become an issue.
"Are we shifting assets in one direction, is that the direction we should be going in?” said Ava Lau, head of reward analytics and optimisation at the London Stock Exchange Group. “We have all seen the excitement LDI could bring... What else is out there?” she said, noting that LDI had been considered a safer way to invest by regulators.
Should the proposed DB funding rules be changed in light of market events?
