A new defined benefit funding code came into force nearly a year ago, but consulting firm Aon says schemes are still adjusting to the new regime, with covenant being one area where change is noticeable.  

The first schemes are now completing valuations under the new code. The revised DB code came into force in November last year for schemes with valuation dates of 22 September or later. It requires schemes to decide on a long-term objective and to reach low sponsor dependency by the time they are significantly mature. The code also introduces the employer covenant into regulation, and a requirement to produce a funding and investment strategy statement.  

The new regime was devised in the era of ultra-low interest rates, when schemes were largely underfunded. It was then delayed by the Covid-19 pandemic, before rising gilt yields led to healthy aggregate DB funding.  

Emma Moore, associate partner at Aon, said the fact most DB schemes are much better funded now than in 2018 “can’t help but make you feel that the key reasons which drove the introduction of the code are now much less relevant – but the baseline for funding standards has been raised both prior to and since its introduction last year”.   

Moore said that since the code was introduced, the majority of schemes have continued their existing practices and shown that they are compliant with the code. 

“However, there is a minority for whom the new regime has meant more significant change,” she added. “In particular, more poorly funded schemes are having to reconsider whether additional security is available to strengthen their position. Where this isn’t viable, there are some schemes where the addition of the Funding Code has done little to improve the situation.”  

One crunch point appears to be around covenant, as schemes that are more reliant on their sponsor have had to gather more information to demonstrate the strength of their covenant and the way in which it supports scheme risks. 

The Pensions Regulator’s DB code and covenant guidance have brought the expected challenges for schemes, said Aon partner Alex Beecraft, particularly where parent company guarantees are significant or covenant information is limited. 

“The first-time adoption issues facing every scheme are different, but there is flexibility in the new regime, and many stakeholders have been willing to be pragmatic when addressing them,” Beecraft noted.  

“The positive side of the new requirements is that they go further in requiring the integration of covenant with investment and actuarial aspects. As a growing number of flexibilities become available to deliver better outcomes for all stakeholders, explicitly recognising how covenant is the foundation of pensions strategy is central to capitalising on them.”