One year on from DB Funding Code: 74% believe there is more they need to consider about the new regime in recent LCP webinar poll

Around three-quarters of respondents in a recent LCP webinar looking at the impact of the DB Funding Code a year after it came into force believe that there is more they need to be considering.

In the webinar, LCP experts highlighted the need for trustees to prioritise integrated risk management and understand and use the flexibilities within the Code where appropriate.

The webinar, which included input from Andrew Dodd from the Pensions Regulator, discussed some of the key issues that LCP believe trustees need to be considering and acting on when it comes to the Code.

• A critical component of the regime is the assessment of employer covenant. LCP say trustees should take a proportionate approach, incorporating the new requirements but not over-engineering the analysis.
• The funding improvements following the LDI crisis in September 2022 have prompted renewed focus on end-game strategies and surplus management. Surplus extraction is now on the agenda and superfunds are expected to present a viable alternative to insurance buyouts. Trustees need to weigh the options, recognising the distinct implications for members and employers.
• Investment strategy is central to compliance with the new regime. The resilience test outlined in the Code can sometimes produce unexpected results—where higher-risk strategies pass and lower-risk ones fail. Trustees should avoid increasing risk just to pass, and instead use the regime’s principles to justify their approach.
• The new regime introduces clearer expectations around actuarial assumptions. Expense reserves are now under the spotlight. For smaller, mature schemes, these can be significant. Importantly, the code allows for some flexibilities which trustees and employers can adopt to reflect their particular circumstances and objectives.

Commenting, David Fairs, Partner at LCP, commented: “The Code has been in force for a year now and it represents a meaningful evolution in pension scheme management. It’s really important for trustees to understand that not everything in the Code is as rigid as it first appears and that there are flexibilities to be used by schemes.”

Jacob Shah, Investment Partner at LCP, added: “Now is the time for trustees to engage proactively with their covenant and investment advisers to ensure their strategy is not only compliant, but they meet the requirements of the Code in a proportionate and pragmatic way.”