With a bit of breathing space between consultations on the new DB code of practice, what better way to spend the long winter nights than considering whether Fast Track or Bespoke is the best route for you and your scheme.

Here, we consider whether the majority of schemes are ready for the new framework and which track they are likely to have to take at their first valuation under the new code.

What do trustees and scheme sponsors think 

The emergence of a Fast Track yardstick has generated a lot of discussion in the pensions world and while the parameters are not yet nailed down, there is a pretty good indication of where they are headed. With the cornerstone of the framework, i.e. the long-term objective (LTO), likely to be set somewhere between gilts + 0.5% and gilts + 0.25%.

With this in mind, we asked over 220 attendees on our webinar earlier this year where they thought their scheme sat within the framework and the results were interesting!

While 35% believed they were in a good place to achieve Fast Track today, 65% did not; so it seems the flexibility of Bespoke will be key for those that need it.

With a summer in lockdown to pick through the bones of the consultation, and the indication that COVID-19 is likely to lead to parameters being set at the more achievable end of the proposed range above, we asked ourselves…

Where do our clients sit against the expected Fast Track parameters?

Looking across the funding plans of a representative sample of our clients, our analysis suggests that 30% of these would pass all four of the Fast Track tests on the LTO, technical provisions, recovery plan and investment risk. Unsurprisingly, this is almost exactly in line with the results on our webinar 6 months ago – never underestimate the intuitiveness of a trustee!

Digging a little deeper into the results though, there are three points that stand out particularly:

1. Covenant – Two-thirds of those that passed the test have a sponsor with a strong covenant rating. This suggests that Fast Track will be a higher barrier to clear for those with weaker covenants and for whom the code is most important.
2. Recovery plans – Where schemes failed the test, the most common reason for this across all covenant grades was recovery plans being too long. In some cases this will be because the deficit has increased since the recovery plan was set or because the recovery plan allowed for additional asset outperformance (which will no longer be permitted within Fast Track).  To comply with Fast Track, we may therefore expect cash requirements to have to increase for sponsors in the short to medium term. In the current environment this might be particularly challenging.
3. Long-Term Objective – 68% of schemes have an LTO at least as strong as gilts + 0.5%. But what if this is set at gilts + 0.25%? Less than 40% of schemes would pass in this circumstance, but the overall pass rate would only marginally reduce to slightly less than 30%. This just emphasizes that schemes really need to have their house in order across all criteria when it comes to the new code, all four tests must be passed to go Fast Track.

What might this mean?

So, it appears as if the success of the code will very much hinge on the parameterisation of the framework and how it differentiates between different covenants. Pinning down these parameters, which is the subject of the second consultation due next year, in a post-COVID pension landscape is likely to affect how many schemes opt to go down the Bespoke route.

For Schemes close to meeting requirements then it could be relatively straightforward to move some of the levers around / do bit of repackaging to be able to go down the Fast Track route.   That repackaging will be harder for Schemes doing something quite different or where the gap is large.

We know that the balance of schemes taking the Fast Track and Bespoke routes will affect TPR’s workload.  TPR have said that they don't have any specific targets for the number of schemes who will follow a certain approach.  However, they are certainly trying to set Fast Track at a level that is appealing to a number of schemes as a more prescriptive route to compliance, so that it focuses the need for regulatory scrutiny and intervention on a smaller number of cases.

We recognise this dynamic, but more fundamentally think the Fast Track bar should be driven by the underlying principle of ensuring the funding regime is appropriate for both scheme members and sponsors in the current market environment.

If you stop and think about the current regime for a second though, every scheme follows a bespoke approach and so even one Fast Track submission should achieve TPR’s aim of reducing the level of regulatory intervention required.

What happens next?

TPR is running its consultation on the new DB funding code in two parts. After this first consultation on the principles, a second consultation on the specific details and parameters will follow next year. In the meantime, watch out for further industry discussion of these issues as TPR develops its thinking further.

For more detail on the above, read our response to the consultation in full.

Want to see how your scheme compares against each of the proposed Fast Track tests? Give our Fast Track tool a try now!