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Covenant: Don’t get caught out by regulatory changes

‘A look ahead to 2023’ download our full report below

2023 is likely to be the biggest year for regulatory change in the defined benefit (DB) world since 2014 (the implementation of the Funding Code of Practice 03), or even since the Pensions Act 2004.

Not only will new legislation be coming into force (in the form of the Occupational Pension Schemes Regulations 2023), but we are likely to see the introduction of a potentially fundamentally different approach to the statutory valuation process within the new Funding Code of Practice.

Autumn 2023 has for some time been earmarked as the ‘go live’ date for the new framework, with high-level principles trailed within the draft Regulations published as part of a consultation in July 2022, and more detail expected in the upcoming DB Funding Code consultation.

There is no guarantee that the Autumn implementation date won’t be further delayed (despite The Pensions Regulator’s clear desire to avoid such a scenario). The devil will be in the detail, but one thing remains abundantly clear – a meaningful assessment of covenant remains fundamental not just to satisfy regulatory requirements but ensuring the protection of members benefits.

In the absence of the finalised position, what can those in the industry be doing?

1. Get ready for the new regulations and Funding Code – don’t get caught out!

Ultimately, the industry knows what is coming. The draft Regulations are now out, and the contents of the Funding Code were trailed (at least at a high level) in the first consultation.

While we might not know the specific detail, the direction of travel is clear. It is rarely too early for trustees and sponsors to engage on fundamental changes such as these and lay the groundwork sooner rather than later.

Emily Goodridge, Managing Director

2. Know the requirements for corporate transactions

Given everything else going on, one might be forgiven for forgetting the details of the recently implemented Pension Schemes Act 2021 (although perhaps not, given the potential civil and criminal penalties introduced!). The Employer Insolvency and Employer Resources tests provide useful context as to how the covenant impact of transactions should be considered.

The long-awaited introduction of the updated notifiable events regime is expected in 2023 and should provide a helpful reminder of not only what needs to be considered but also when it needs to be considered.

Transactions can happen quickly, particularly in stressed times, so it is worth being well-briefed and well-prepared on these requirements.

3. Think about the bigger picture and remain vigilant to risks

Administrative requirements, for trustees in particular, are at an all-time high. Amongst all this paperwork, it might be easy to be drawn into a ‘box ticking’ mentality, focusing on satisfying the regulatory requirements ahead of the basic promise to pay members benefits.

Many schemes will have emerged from the recent market turmoil with very different funding positions and the decisions corporates and trustee make on next steps will be critical. It is more important than ever to remain vigilant to key risks, particularly in these times of increasing volatility. As ever, covenant is the ultimate underpin for scheme risks.

A look ahead to 2023

A year of reflection, consolidation and recasting strategies.

A look ahead to 2023

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