There is a new DB Funding Code which will come into force from October 2023. Any of your clients who are employers of DB pension schemes will need to be aware of this as it will change the basis on which their scheme’s triennial valuations are reported and assessed. It may mean higher employer contributions are needed and will also result in higher compliance costs for the scheme, at least initially.

The date on which schemes will have to comply with the new code and the underlying regulations will depend on when the schemes’ next triennial valuation ‘as at’ dates after October 2023 are, as that is when the new requirements will bite. Employers of schemes should be aware that, based on whether this date falls before or immediately after October 2023, their scheme trustees and advisers will either have to be part of the first wave of schemes to work out how to comply, or will have the luxury of watching others in the industry get it right (and wrong) first. Higher costs for compliance with the new code are anticipated either way – as well as potentially higher employer contributions being needed to meet the code’s requirements – but employers of schemes that are part of that first wave to comply should expect especially high costs and tight turnarounds for compliance work. Employers should also note that moving the scheme’s valuation forward is possible but cannot be done simply to avoid being one of the first schemes to comply with the code.

Employers should be aware that the code introduces a new two-track system for Regulator engagement/assessment. Schemes will have to decide whether they qualify for the low-Regulator-intervention ‘fast-track’ option, or whether they need to comply with the requirements via the ‘bespoke’ option. The code and regulations define the parameters by which a scheme can qualify for the fast-track option. The Regulator has been keen to point out that the bespoke option is not a poorer option for worse funded schemes and that fast-track will not be appropriate for many schemes (the Regulator has said it expects the split to be 50/50). Though fast-track compliance may seem like the cheaper option to many employers, it may not be possible to pursue that route, and discussions with scheme trustees will be necessary to agree on which one is appropriate for the scheme.

Employers of schemes that do not currently take much or any covenant advice should be aware that the code will require all schemes to do so. The Regulator envisages that this additional covenant advice will aid trustees in making risk-appropriate investment decisions. Employers should expect increased costs and requests for information that they will have to provide to covenant advisers.

The code is currently being consulted on and the underlying regulations are still in draft. Both are likely to change and the extent to which they will change is not yet known. There are a number of areas where comment, opposition, clarification and/or changes are expected. But employers should be aware that, despite the tight timeframes, the new code and regulations will come into force from October 2023 and that compliance will cause increased costs.