Confusion on use of Fast Track and mixed messages elsewhere
LONDON, 26 August 2020 – Aon plc (NYSE: AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions, has responded to the Pensions Regulator’s (TPR) defined benefit funding code of practice consultation. While Aon is generally supportive of the principles in the consultation, it does have concerns about how they will be applied.
Most prominent among Aon’s concerns is the belief that the Fast Track structure is being used too broadly and that it cannot achieve all those objectives.
Matthew Arends, partner and head of UK Retirement Policy at Aon, said:
“The Fast Track structure is in danger of suffering from ‘mission creep’ as its use is proposed in many different ways, including:
- as a simplified compliance option,
- as a measurement for comparison with a scheme’s bespoke solution, and
- as a default that TPR may impose if it is not satisfied with the funding outcome agreed by the sponsor and trustees.
“It’s our view that this was not the original policy objective of Fast Track and we don’t believe that it can achieve all these objectives. For example, judging bespoke solutions against Fast Track compliance does not seem consistent with the concept of scheme-specific funding regime.”
Matthew Arends continued:
“Further, we see Fast Track could lead to a levelling down for schemes that have made good progress on strong long-term objectives. In Aon's ‘In Depth’ analysis, 55% of schemes with Tranche 14 valuations (from September 2018 to September 2019) had set long term funding targets stronger than the proposed FastTrack gilts+0.25% to gilts+0.5%pa.
“It’s also possible that Fast Track’s investment simplicity may have the unintended consequence of encouraging investment changes by schemes to favour some asset classes – particularly low risk/low return liquid investments. This is because those asset classes may make it easier for schemes to pass the Fast Track test even though such asset class changes may not be in the broader interests of the scheme.”
Lynda Whitney, partner at Aon, said:
“There are also a number of areas where we see mixed messages coming through from the consultation. For example, we see covenant strength stated as important, and yet its importance under Fast Track is minimal if schemes are mature or is reduced due to a focus on the length of future covenant visibility. Given that failure of covenant is ultimately the only risk that will result in members entering the Pension Protection Fund and receiving less than full benefits, any reduction in the importance of covenant is a concern – and especially when we are approaching a time of extreme economic uncertainty.
“Another instance of ambiguity is in what is meant for technical provisions to “be consistent” with the Long-Term Objective (LTO), and whether the gap to the LTO is then funded by contributions or investment performance. There is a risk of increased costs to UK plc if TPR expects all schemes’ technical provisions to converge with the LTO by a fixed timeline.
Lynda Whitney continued:
“Similarly, although alternative financing is supported by TPR, they have not resolved some of the practical issues of how it can be taken account of in the funding regime, as it often can’t count directly towards the Recovery Plan.”
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