Key takeaways

Trustees and employers need to be aware of the new requirements, and work with their advisers to put in place a funding and investment strategy so that they can comply with the new requirements for actuarial valuations from 22 September 2024.

They should also look out for the DB Funding Code, which is expected to be published in the Summer, and will contain further detail of how the new DB funding regime will work in practice.

In depth

The Pension Schemes Act 2021 introduced a revised DB funding regime including a requirement for schemes to have a “funding and investment strategy” to a self-sufficient end point. Trustees will be required to prepare a written "statement of strategy" setting out the funding and investment strategy, that must be agreed with the employer, and submitted to the Pensions Regulator ("Regulator") with the scheme's actuarial valuation.

Consultation on the draft Regulations ran from July to October 2022. In December 2022, the Government issued the Code for consultation which, together with the Regulations and other ancillary documents will, when finalised, set out the new DB funding regime. The Government has taken time to consider the high volume of responses to both consultations, and the impact on scheme funding of the LDI crisis and other changes in economic conditions, before publishing its response to the consultation on the Regulations.

What differences are there between the final Regulations and the draft which was previously consulted on?

In essence, the Regulations do not substantially change the new DB funding regime that was consulted on in 2022, and there are no real surprises, despite some suggestions to the contrary. Of note, the Government has listened to industry feedback, and made a number of welcome changes in areas where concern had been expressed. These include:

• An express reference in the Regulations for open schemes to take into account new entrants and future accrual when determining future scheme maturity, subject to assessing the financial ability of the employer to support the scheme. This supports the Regulator's stated intention that open schemes should be allowed to thrive, and for trustees to be able to invest in a way that fits the circumstances of their scheme including, where appropriate, being able to invest in a significant proportion of long- term return seeking assets.
• Amendments to the provisions for scheme maturity, including a fixed date of 31 March 2023 on which to base economic assumptions to calculate scheme maturity, to reduce volatility in calculating the duration of liabilities measure.
• Revisions to the definition of "relevant date" for schemes that have reached significant maturity to the date of the relevant actuarial valuation (so that there is no need to use historic data), and giving the Regulator flexibility to set a different duration of liabilities for different types of schemes in the Code (which was a concern raised in response to the consultation in particular with regard to cash balance schemes).
• Revisions to the requirements for low dependency investment allocation so that schemes do not have to ensure that assets and cash flow are broadly matched, and can continue to invest in an appropriate proportion of growth assets (including productive finance), rather than being restricted to government and corporate bonds; it is also confirmed that low dependency investment allocation does not apply to surplus.
• Clarifying that there is no intention to change trustees' independence in making investment decisions. The response to the consultation notes that the Regulator expects the trustees' investment strategy to be broadly consistent with the funding and investment strategy (which requires agreement with the employer), however it is for the trustees alone to decide on the actual investments made.
• Amendments to the provisions for assessing employer covenant (which is defined in legislation for the first time) to include an assessment of the employer's immediate and future financial ability to support the scheme, and to allow a greater range of factors to be taken into account (including contingent assets).
• Revisions to the provisions for the "journey plan" to include it within the funding and investment strategy.
• Amendments to the requirements for the level of detail to be included in the funding and investment strategy.

While the Government appears to have taken into account the majority of concerns raised during the consultation process, there are a few areas have not changed, for example:

• The Government has not amended the requirement that funding deficits are recovered as soon as the employer can reasonably afford, though the Regulations have been amended to require the trustees to consider the impact of the recovery plan on the employer's sustainable growth when preparing it.
• On grounds that revisions have been made to the low dependency investment allocation provisions (see above), the Government has not revised the low dependency funding basis and, in particular, no account is taken in assessing employer covenant for this purpose on reliance on contingent assets.

In addition, there are still some areas that will require further consideration once the Code is published, for example:

• What is specified in the Code (which is easier to amend) and what is specified in the Regulations.
• What is the position if schemes move in and out of significant maturity.
• What happens if the trustees and employer cannot agree the funding and investment strategy.

Until we have the other "pieces of the puzzle", in particular the Code, (expected in the Summer) it is difficult to be more definitive, but we do at least now have a new process to follow.

It should also be noted that we are also still awaiting further guidance on the statement of strategy (expected in the next few weeks) and employer covenant (expected in late Summer).