(June 11, 2014) — The UK’s Pensions Regulator has clarified its position on risk and moved to reassure corporate defined benefit (DB) funds over their investment portfolios.
In its response to a consultation exercise for an updated code of practice for DB funds, which ran over the past six months, the regulator admitted its initial call for answers from the industry had been unclear in some of its intentions.
“We accept that we had not been sufficiently clear on the more positive aspects of risk,” the regulator said. “Therefore, we have made a specific reference to upside risk or reward in the final code, and in a similar vein we also acknowledge the issue of trapped surplus in contingency planning. We have also clarified the effect of low risk/high risk scheme investment strategies on employers’ cash flows and ongoing covenant.”
The regulator also acknowledged that some readers may have “interpreted some of the original drafting as meaning that all risks that may crystallise need to be covered and that repair for downside risk should be immediate.”
This was not the regulator’s intention, it said. It has therefore made changes to the code for DB funds to clarify that pension investors “should seek to ‘manage’, not ‘mitigate’ risk, and that the employer should neither have to cover all conceivable risks, nor repair immediately those that crystallise”.
Critics had also said the regulator had seemed to favour de-risking rather than continuing an investment strategy. This, again, was not the regulator’s goal, it said.
Several consultants and pensions groups applauded the move to dispel these fears.
Joanne Livingstone, technical director at Punter Southall welcomed the new code of practice “and its confirmation that a new regime of proportionate integrated risk management will come into operation”. Livingstone said that many criticisms of the previous drafts wanted a more balanced focus on both upside and downside risk.
Zoe Murphy, partner at law firm Sackers, said: “The regulator’s proposed risk management tool, the Balanced Funding Outcome (BFO), has not survived the final cut. The BFO has been renamed the funding risk indicator and is just one of a range of risk indicators against which the scheme will be tested before the regulator considers intervention. It is hard to know at this stage whether this will make any material difference to the regulation of schemes—but at least it does have the virtue of being easier to understand!”
The full document can be found here.
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