Election may delay new pensions Funding Code

The Funding and Investment Strategy Regulations, implementing the new funding regime, were issued in April 2024. Under the new regime, trustees are required to adopt a strategy for their scheme to be fully-funded on a low-dependency basis by a specified date, no later than the point at which the scheme reaches "significant maturity". "Low dependency" for this purpose means that further contributions are not expected to be necessary. In most cases trustees will be required to agree their proposed strategy with the employer.

The final piece of the jigsaw is still awaited: the relevant Code of Practice from The Pensions Regulator. This is crucial. The Code will set out the Regulator's expectations as to how parties should approach the new regime, including the assessment of employer covenant and the weight to be placed on contingent assets. More fundamentally, the Regulations provide that a key matter – the test for determining when a scheme reaches significant maturity – is to be set out in the Code.

Fortunately the Regulations provide for a breathing space: the new funding regime will apply only to valuations with an effective date on or after 22 September 2024. The Regulator indicated earlier this year that the Code would be finalised "in the summer". It was expected that the Code would then be issued ahead of 22 September.

The election announcement raises questions. The Regulator may keep to its timetable, but a prescribed process must then follow in order for the Code to become effective. A proposed Code must be submitted to the Secretary of State for approval. If approved, the proposed Code must be laid before Parliament for 40 days, ignoring periods when Parliament is prorogued or materially adjourned. Only at the end of the process can the Code be issued.

With the current Parliament prorogued and the likelihood of a summer recess after the next one is convened, timing looks tight. There is a real chance that the Code will not be issued ahead of 22 September when the new funding regime kicks in.

In practice a modest overrun may not create huge problems, even in cases where valuation dates fall shortly after 22 September. Legislation allows 15 months for the valuation process. So a valuation dated 30 September 2024 would not need to be completed until the end of 2025. Against this background, it may not matter greatly if a Code (published in draft over the summer) is issued slightly after 22 September, rather than before.

This does however presuppose that the relevant Secretary of State will readily approve the draft. A hold-up seems unlikely, but not unthinkable. Labour has after all said that, if elected, it will carry out a wide-ranging review of the pensions landscape, seeking to tackle "regulation-induced risk aversion" and other "barriers to investment in UK companies" ("Financing Growth", January 2024). The new funding regime, and its implications as regards investment de-risking, will surely be in scope.

The review feels like a longer-term project rather than something which would delay ministerial approval of the Code. But on any showing, trustees and employers working towards a late-2024 valuation face two significant uncertainties: what the Code will say; and when it will finally be in place