News | March 7, 2024



The Department for Work and Pensions recently published the government’s response to its consultation on the defined benefit (“DB”) funding and investment regulations, alongside a revised draft of the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 (the “Draft Regulations”).

The Draft Regulations set out the requirements for DB schemes to provide a funding and investment strategy and submit a statement of strategy to the Pensions Regulator (“TPR”). This should enable TPR to intervene more effectively to protect members’ benefits where needed.

The Draft Regulations were laid before Parliament on 29 January 2024 and are expected to come into force on 6 April 2024. They will apply to valuations with effective dates on and from 22 September 2024. Schemes will then have 15 months from the effective date of their valuation to agree a new funding and investment strategy alongside any recovery plans.

In this article, we discuss the key aspects of the Draft Regulations and action points for trustees.

Funding and Investment Strategy

A key aspect introduced by the Draft Regulations is the requirement for trustees of DB schemes to have a funding and investment strategy setting out how pensions and other benefits will be provided over the long term. Regulations 4 to 13 and Schedule 1 set out the matters that trustees must take into account in establishing or updating the scheme’s funding strategy. The Draft Regulations set out the level of detail needed in the funding strategy and the period within which the strategy must be determined and subsequently reviewed.

The Draft Regulations also introduce a requirement for trustees to set out a plan of the funding level they intend the scheme to have achieved at the ‘relevant date’. The relevant date is a date not later than the end of the scheme year in which the actuary estimates the scheme is expected to reach ‘significant maturity’ i.e. the date when a scheme reaches a duration of liabilities set by TPR. For those schemes already at significant maturity, the relevant date is the effective date of the actuarial valuation used for the purposes of the funding strategy.

To ascertain the funding level, trustees must use an accrued benefits funding method and calculate the liabilities of the scheme on a ‘low dependency funding basis’. Low dependency means that that there should be little to no reliance on employer contributions in order for a scheme to meet its liabilities.

The Draft Regulations also require schemes to have a ‘low dependency investment allocation’, meaning that scheme assets are invested so that their value, relative to the value of the scheme’s liabilities, is highly resilient to short-term adverse changes in market conditions. Employer contributions are not expected to make provision for the scheme’s liabilities.

Statement of Strategy

One of the main obligations for trustees arising under the Draft Regulations is the requirement to prepare a written statement of strategy (the “Statement”) and submit this to TPR. The Statement must set out the scheme’s funding strategy alongside other matters, including a review of the employer covenant.

Section 221B of the Pensions Act 2004 sets out the main statutory requirements for providing a Statement, as inserted by Schedule 10 of the Pensions Act 2021. Most of Schedule 10 itself is not currently in force, however, limited provisions enables regulations to be made under section 221B.

We have summarised below some of the key requirements for the Statement under regulations 14 to 19 and Schedule 2 of the Draft Regulations:

  • Regulation 15 trustees must review or revise the Statement after any review of the scheme’s funding strategy.
  • Regulation 16 the Statement must be signed by the trustee chairperson.
  • Regulation 17 the Statement must provide the proportion of assets allocated to different categories of investments. Trustees must also explain the evidence used in deciding various matters set out in Schedule 2 including the investment risk and the employer covenant.
  • Regulation 18 the Statement must be submitted in a form provided by TPR.
  • Regulation 19 trustee must send the Statement to TPR as soon as reasonably practicable after the Statement has been prepared or revised. There are more stringent time limits set in certain circumstances e.g. where TPR has given directions to the trustees to revise the Statement if certain requirements have not been met.
  • Schedule 2 other points to include in the Statement are:
    • a summary of the information contained in the actuarial valuation used for funding strategy;
    • the actuary’s estimate of the maturity of the scheme as at the effective date of the relevant actuarial valuation;
    • the level of risk in relation to the intended investment of assets of the scheme;
    • how the assets of the scheme are invested in investments with sufficient liquidity to enable the scheme to meet expected cash flow requirements; and
    • an assessment of the strength of the employer covenant.

Scheme Specific Flexibilities

During the consultation, the pensions industry flagged a number of concerns regarding the Draft Regulations, including that they encouraged schemes to be overly risk-averse in their investment decisions. Following feedback, amendments have been made to the Draft Regulations that will be seen as welcome changes to most.

In particular, the Draft Regulations now have more flexibility in the following areas:

  • actual investments are not constrained and mature schemes may diversify their investments;
  • when establishing the point at which an open scheme will reach significant maturity, new entrants and future accrual can be taken into account and open schemes continue to invest in high-growth assets;
  • TPR has discretion in relation to the information it requests of schemes in certain cases. This should lessen the administrative burden rather than having a ‘one size fits all’ approach; and
  • while schemes must reflect the principle of reaching full funding by the relevant date, there is no requirement to invest in line with the low dependency investment allocation.

Funding Regulations 2005

The Draft Regulations amend provisions of the Occupational Pension Schemes (Scheme Funding) Regulations 2005 e.g. in relation to the calculation of technical provisions which must be in line with a scheme’s funding strategy, the appropriateness of a scheme’s recovery plan and the content of actuarial valuations.

Concluding Comments

The new requirements may be further away for some schemes than others. For instance, schemes that are at the beginning of their triennial valuation cycle will have more time to comply than schemes with valuation effective dates ending shortly after 22 September 2024 (e.g. as at 31 December 2024).

Trustees and employers should maintain open communication regarding any required implementation of targets or revisions to current targets. Likewise, should issues arise that may impact the employer covenant regarding scheme funding, employers should inform trustees promptly.

Where there is not already a trustee chair of the scheme, one will need to be appointed for the purposes of signing the Statement.

While it was hoped publication would dovetail with the publication of the Draft Regulations, TPR announced on the 28 February 2024 that its new DB Funding Code of Practice (the “Code”) is set to be published and laid before Parliament in Summer 2024 to come into effect in September 2024 at the same time as the Draft Regulations first apply to valuations The Code should provide useful supplementary guidance for trustees getting to grips with new requirements.

In addition, (1) on 5 March 2024 TPR published a Consultation on the proposed Statement of Strategy and we will report on this in the next edition of Pensions Compass, (2) TPR will publish in the Summer the finalised parameters for fast – track valuations, and (3) later in the Summer TPR will be consulting on covenant guidance.

This piecemeal approach does not make life easy for scheme trustees.

It is important that trustees understand the new requirements and any impacts on their existing funding strategy. In meeting the new requirements it may be possible for trustees in part to recycle or re-express other material or cross reference to other material or policies. Trustees should consult their legal and actuarial advisers over the new requirements and compliance. If you require guidance on the Draft Regulations, please do not hesitate to contact a member of our team.