"It was never (the U.K. government's) intention to bear down on risk-taking across the board. Rather, it was to make funding standards clearer and to promote planning for the long term," said Paul Maynard, U.K. minister for pensions, in a news release. "By listening to stakeholders, we've learned that it is easy to inadvertently drive reckless prudence and inappropriate risk aversion."
The U.K. government received 92 responses to the consultation, including from representatives and sponsors of occupational pension plans.
The U.K. government said respondents to the consultation were concerned that the draft regulations "did not fully reflect" the circumstances of open pension plans. Some respondents claimed the draft regulations would prevent trustees of open plans from taking account of new entrants and future accruals when managing their plan funding, which could lead to these pension funds planning to derisk sooner than necessary.
"The (U.K.) government says it has revised the regulations to better support the productive finance agenda," said Graham McLean, head of pension scheme funding at Willis Towers Watson, in an emailed comment. "While some of the tweaks may help this, the suggestion that schemes will have freedom over investment is more implicit than it needed to be, and it is hard to see anything in the final regulations which fulfills the promise to 'make it explicit that there is headroom for more productive investment.'"
The government consultation also noted that the majority of U.K. defined benefit plans are closed, and that more than one-third of pension plans have retiree liabilities accounting for over 50% of their total liabilities. As a result, longer-term strategic planning has become increasingly important to manage the funding and investment risks attached to a mature pension plan.
"An initial reading of the new regulations suggest that the Department for Work and Pensions has listened to industry feedback and made some positive revisions to the DB funding code regulations which enhance flexibility, especially for open DB schemes," said Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association in an email. "Importantly, it also clarifies that DB schemes can take appropriate levels of investment risk where supportable by the employer covenant. Notably, the final set of regulations specifically provide greater flexibility by empowering mature schemes to diversify investments in a wide range of assets without constraints," Peaple added.
There were also concerns that the new regime would result in a disproportionate governance burden for small pension plans, and some respondents were concerned that the proposed legislation was not appropriate for cash balance plans that sit alongside defined contribution plans.
In response to the consultation, the U.K. government provided assurance that investment in sustainable growth "is a matter to consider" alongside the affordability principle. It was also made clear that open pension plans can take account of new participants and future accruals when determining when the plan will reach significant maturity.
In certain cases, The Pensions Regulator will also be given the flexibility to ask for less detailed information from smaller pension plans so as to reduce regulatory burden.
Maynard said the U.K. government will look for the regulations be effective in April and apply to pension plan valuations beginning in September.
"The increased focus on scheme-specific flexibility is to be welcomed given the risk of inflicting unnecessary cost and burden onto smaller schemes," said Simon Kew, head of market engagement at consult Broadstone, in an emailed comment to Pensions & Investments. "Trustees and employers now have the clarity to set in place long-term plans for schemes that will benefit members while delivering a regime that will encourage potential benefits for the U.K. economy."
The Society of Pension Professionals also welcomed the changes to the upcoming legislation following the consultation, though the group warned that detail contained in TPR's upcoming funding code will be crucial to understanding how these regulations will work in practice.