Consultation outcome

Government response: The draft Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2023

Updated 29 January 2024

Foreword by the Minister for Pensions

I am very pleased to be publishing the Government’s response to the consultation on these important Regulations.

I would like to thank all the pension scheme trustees, sponsoring employers and other organisations who responded. With your help we have improved the draft Regulations so that they can work effectively with the Regulator’s revised Code for the full range of private sector defined benefit (DB) schemes. These Regulations strike a fair and lasting balance between security for members and affordability for sponsoring employers as the economic context evolves.

As the Government presses on with its productive finance agenda, I have been encouraged by the helpful engagement we have had from stakeholders. It was never our intention to bear down on risk taking across the board. Rather it was to make funding standards clearer and to promote planning for the long term. By listening to stakeholders, we’ve learned that it is easy to inadvertently drive reckless prudence and inappropriate risk aversion.

That is why we have made changes to make the Regulations explicitly more accommodating of appropriate risk taking where it is supportable, and to increase the scope for scheme specific flexibility. This will support trustees in reacting to changing circumstances and investing appropriately in the best interests of their members. The Regulations will embed existing good practice, by clearly defining how the metrics set out in the Pension Schemes Act 2021 will be applied. This will enable The Pensions Regulator to intervene more effectively where things go wrong.

But more importantly, they set a clear framework to support sponsors and trustees in getting it right. In a world where most schemes are closed it is more important than ever that sponsors and trustees are working together and planning for the long term. These Regulations support them in doing that.

With the improved funding levels, we have seen, it is particularly important that funding standards are crystal clear. These Regulations demonstrate the clear scope for most schemes to take more investment risk, while keeping members’ benefits safe. That is why there are clearer metrics that set sensible limits. In this way we can encourage schemes to get their assets working hard for them, while ensuring that scheme members can be confident, they will get the benefits they were promised, and have worked hard for.

The direction is set, and subject to parliamentary approval we will legislate for the Regulations to come into force from April 2024 applying to scheme valuations from September 2024.

Paul Maynard MP
Minister for Pensions

Chapter 1 – Introduction

1.1. This document sets out the Government’s response to the consultation, a summary of the views raised by respondents, and includes the final draft of the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024. It is envisaged that Northern Ireland will make corresponding Regulations to ensure a consistent approach across the United Kingdom.

1.2. The remainder of chapter 1 sets out the background to this Government response, including the rationale for the introduction of these Regulations. Chapter 2 provides a summary of the views raised by those who responded to the consultation, along with a summary of the Government’s response and an overview of the new scheme funding regime. Chapters 3-6 set out the Government’s response to each component of the consultation in full and point to revisions made to the Regulations.

1.3. Annex A is an analysis of the responses we received to the consultation. This is not an exhaustive commentary on every response received but is an expansive summary of the key issues and concerns raised. Annex B provides a full list of respondents to the consultation. Annex C is the final draft of the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024.

1.4. Please note that where we have amended the draft Regulations we consulted on, the numbering has changed. The numbering used in this document refers to the current draft Regulations. However, where provisions have been deleted the numbering refers to the draft Regulation that we consulted on.

Background

1.5. The majority of defined benefit (DB) schemes are now closed to future accrual and are maturing, and over one-third of schemes have pensioner liabilities accounting for over 50% of their total liabilities. As a result, longer-term strategic planning has become increasingly important to manage the funding and investment risks attached to a mature scheme.

1.6. The draft Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2023 set out the legislative detail of a new scheme funding regime designed to protect scheme members for the long-term. The new regime is the culmination of a much longer phase of policy development. It has been built on extensive discussion, engagement, and consultation by the Department for Work and Pensions (DWP) and by The Pensions Regulator (TPR), starting from a Green Paper in 2017 to more recent productive finance consultations.

1.7. DWP consulted on the draft Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2023 in July 2022, which set out the requirements for DB schemes when determining their funding and investment strategy and statement of strategy. TPR also consulted on the principles that would underpin a revised DB Funding Code of Practice (the Code) published in March 2020 and a draft Code published in December 2022 which provides practical guidance on how trustees can comply with scheme funding requirements.

1.8. DWP’s consultation proposed the following measures:

• the funding and investment strategy must, as a minimum, follow the principle that by the time the scheme is significantly mature there is low dependency on the sponsoring employer with high resilience to funding and investment risks.
• the maximum levels of funding and investment risks that the scheme can take before significant maturity is dependent on the financial ability of the employer and contingent assets to support the scheme. Subject to that, they are also dependent on the maturity of the scheme.
• the funding and investment strategy must be determined or reviewed and, if necessary, revised alongside each valuation (usually every three years) and after any material change in the circumstances of the pension scheme or of the employer.
• more detailed requirements for the statement of strategy and for the chair of the trustee board. The statement of strategy must include a section setting out further information on the scheme’s strategic asset allocation, how trustees intend the strategic asset allocation to change as their scheme moves along its journey plan, and the level of risk attached to these investments.
• amendments to the Occupational Pension Schemes (Scheme Funding) Regulations 2005 which add a new requirement for trustees and managers in determining whether a recovery plan is appropriate. Trustees must follow the new affordability principle that funding deficits must be recovered as soon as the employer can reasonably afford.

1.9. When the Regulations are brought into force, trustees will be required to put in place long-term strategies that focus on delivering the pensions and other benefits promised to members. Furthermore, the introduction of clearer funding standards is designed to enable TPR to intervene more effectively to protect members’ benefits when needed.

Chapter 2 – Executive summary

Summary of responses to the consultation

2.1. The Government has carefully considered the views raised in response to the consultation. We have revised the Regulations we consulted on to ensure the scheme funding regime continues to apply flexibly across all DB schemes. The regime will strike the right balance between member security and employer affordability to provide the best possible retirement outcomes for scheme members, while supporting flexibility for sponsors and trustees on how legacy DB liabilities are managed.

2.2. The Government received 92 responses to the consultation from a variety of organisations across the pensions industry. Respondents included: representatives of occupational pension schemes, sponsors of occupational pension schemes, legal and consultancy firms, trade associations, trade unions and individuals.

2.3. We have undertaken a qualitative analysis of the responses, and the common themes, trends and views are summarised within this document. We are grateful for the care and attention given to the responses and the level of detail provided. The responses we received provided nuanced answers which often went well beyond what the questions were asking. This provided a great deal of rich information, and valuable insights which we have found very helpful. Some respondents said it was difficult to give a view on parts of the draft Regulations without having sight of the draft Code. The subsequent publication of the draft Code provided greater clarity, and we continued to engage with stakeholders - and listen to their views – after the draft Code was published. We noted that stakeholders were generally reassured about the detail of the draft Regulations when they were able to see the fuller picture formed by both draft Regulations and Code together.

2.4. This document therefore sets out the Government’s final position, taking account of all the consultation responses we received and subsequent discussions with stakeholders. Given the richness of the responses we think it is more helpful to set out the broad themes which emerged in the responses, rather than structuring it around the specific questions, as this better reflects the range of concerns which have emerged, and the Government’s thinking in response to those concerns.

2.5. Stakeholder concerns about the draft Regulations were raised by respondents in five broad thematic areas:

Flexibility and stability in long-term planning

2.6. Respondents thought the draft Regulations should provide a stable framework for long-term planning, but greater scope for schemes and sponsoring employers to fund and invest flexibly within that framework. They considered that the measure of scheme maturity created too much uncertainty as its sensitivity to market conditions would mean schemes’ long-term plans could be disrupted by changes in economic conditions.

2.7. They suggested that the definition of low dependency investment allocation and how this interacts with investment decisions would limit the types of assets schemes can invest in and would not apply flexibly to the specific circumstances of each individual scheme.

2.8. There were concerns that if employer contributions were to increase, because of the new affordability principle, some schemes might become overfunded and that trapped surpluses could arise as a result.

Risk aversion

2.9. Respondents thought the draft Regulations would introduce a new scheme funding regime that would be too risk averse, which could increase the cost of providing DB pensions to the detriment of sponsoring employers’ businesses. They considered that schemes should be able to take some additional risk at and after significant maturity.

2.10. There were suggestions that the new affordability principle would eliminate any risk-taking in the recovery of scheme deficits. Respondents contended that it would require employers to release too much of their available capital into their pension schemes too quickly and would not allow for appropriate other uses of the employer’s cash alongside contributions to the scheme and may limit their ability to allow for investment returns to contribute towards deficit recovery. This would then have an adverse impact on investment in the sustainable growth of employers’ businesses.

Open schemes

2.11. Respondents were concerned that the draft Regulations did not fully reflect the circumstances of open schemes. They suggested the draft Regulations would prevent trustees of open schemes from taking account of new entrants and future accrual when managing their scheme funding, which could lead to these schemes planning to de-risk sooner than necessary and increased Technical Provisions.

Administrative burden

2.12. There were concerns that the new regime would result in a disproportionate governance burden for small schemes, due to the amount of information trustees would have to provide to TPR within the draft statement of strategy.

Alternative scheme designs

2.13. Some respondents were concerned that the Regulations would only work for ‘traditional’ DB schemes and not for cash balance schemes that sit alongside Collective Defined Contribution Schemes.

Summary of the Government’s response

2.14. Some of the themes identified were also reflected in the Work and Pensions Committee’s inquiry into liability driven investments in March 2023. Many commentators were reassured when they saw the Regulator’s draft DB Funding Code, which they thought described a more flexible, and scheme specific regime than the draft Regulations seemed to set out. The regime described in the draft Code was an interpretation of these draft Regulations in line with the Government’s intention. We have worked closely with the Regulator, and we have listened to the concerns and have sought to explicitly anchor the flexibilities described in the draft Code in these Regulations to put the matter beyond doubt.

And we have gone further, by making additional changes to embed more scheme specific flexibilities. These revisions deliver the following outcomes:

• making clearer the flexibilities that were intended within the draft Regulations. For example, the Regulations do not constrain actual investments and even mature schemes can invest in a wide range of assets
• providing assurance that the investment in the sustainable growth of sponsoring employers’ businesses is a matter to consider alongside the affordability principle
• making it explicit that open schemes can take account of new entrants and future accrual when determining when the scheme will reach significant maturity
• making long-term planning and implementation easier and avoiding unnecessary administrative burden by giving The Pensions Regulator, for example, the flexibility to ask for less detailed information in some cases, depending on the circumstances of the scheme

The new regime as part of wider government strategy

2.15. The clearer funding standards demonstrate the potential for many schemes to make their assets work harder. We note that 70 to 75% of schemes meet TPR’s proposed Fast Track^{[footnote 1]} investment stress parameter, meaning there is potential scope for higher risk taking if the trustees believe that appropriate and in line with their fiduciary duties. Higher levels of investment risk beyond Fast Track can be taken for those taking the Bespoke approach where they can justify their approach. TPR will be reconsidering their Fast Track parameters in light of their consultation responses and the changes in market conditions since their original analysis was done. This will be published alongside their final revised DB Funding Code.

2.16. These clearer funding standards will provide a foundation for the next phase of policy development which will seek to explore whether assets could work harder for all stakeholders, while keeping members benefits secure. The Regulations will work well with our proposals for Superfunds. At their heart is the notion of setting a long-term destination for maturing schemes, such as insurance buyout, Superfund consolidation, or running on with the support of a sponsoring employer. The clearer funding standards will clearly demonstrate potential headroom in the regime for additional productive investment and provide a critical framework to underpin the DB invest for surplus ideas set out in the Call for Evidence^{[footnote 2]} by not only demonstrating the scope for further productive investment, but also setting clearer limits on risk taking so that members’ benefits remain appropriately protected. Clearer funding standards are also entirely compatible with the ideas around an expanded role for the Pension Protection Fund.

2.17. This approach also applies to the journey plan requirements. Respondents were concerned that the journey plan in the funding and investment strategy was too inflexible. We have revised the Regulations, to make clear that while the Funding and Investment Strategy must reflect the principle of reaching full funding by the relevant date, there is no free-standing requirement for trustees or managers to invest in line with the Low Dependency Investment Allocation. The Regulations do not, therefore, change trustees’ duties in respect of investment decisions – they just set out the requirements for a plan to be in place for this. We think this fully addresses concerns that we were shifting the balance of power towards sponsors and giving sponsors a direct say in investment decisions and sets an appropriate balance. This is set out in more detail at paragraph 3.18 et seq.

2.18. Open schemes will continue to be able to invest in a significant proportion of high-growth assets where appropriate. They will be able to take account of new entrants and future accrual in scheme maturity calculations, which will extend the period before the scheme is expected to reach low dependency, lowering their funding requirements compared to schemes that are closed. The new scheme funding regime will establish a regulatory environment in which open schemes can thrive, to the benefit of their members, sponsoring employers and the UK economy.

2.19. One issue that came through quite strongly in the consultation was the timing of the implementation of the new regime, and some respondents thought we should allow more time before the changes come into force. The Regulations will come into force on 6 April and will apply to valuations with effective dates on and after 22 September 2024. This extra time will give the pensions industry sufficient time to prepare before the requirements take effect. We do not think introducing a transitional arrangement would be necessary. Schemes will have 15 months from the effective date of their valuation to agree a new Funding and Investment strategy and any recovery plans. As our analysis set out in the Impact Assessment document indicates, a significant number of schemes will not have to comply with the new arrangements until 2027 or when their valuations are due, and most schemes will not need to make radical changes to their existing arrangements as there is significant flexibility built into the Regulations.

Chapter 3 – Funding and investment strategy

Government response

Scheme maturity

3.1. Most respondents said it would be better to set the duration of liabilities at which a scheme reaches significant maturity in the Code as this would provide more flexibility for it to be adjusted if needed, particularly when responding to changes in market conditions. Respondents were looking for more certainty in relation to the time to significant maturity. Several respondents suggested that, to reduce the impact of market conditions, the duration at which schemes reach significant maturity should be less than 12 years, or the impact of setting significant maturity at a duration of 12 years should be reviewed. Some respondents suggested the point of significant maturity should be set within a range - for example between 10 to 12 years - while others thought the calculation of duration should be changed to assume a fixed real gilt yield. A few stakeholders were seeking freedom to choose different measures of maturity. Overall, stakeholders agreed that the duration measure was the best approach.

3.2. Maturity is a measure of how far a scheme is through its lifetime. Regulation 4(1)(a) requires the maturity of schemes to be measured in years using a duration of liabilities measure. There are several ways to measure scheme maturity, each with advantages and disadvantages but, on balance, the Government considers duration of liabilities to be the most appropriate measure. It is relatively straightforward for scheme actuaries to calculate, and it avoids the disadvantages that other measures might have for smaller schemes.

3.3. We do, though, understand the concerns raised about the potential volatility of the duration of liabilities measure, given its sensitivity to market conditions. In some cases, the steep rise in gilt yields at the end of September 2022 caused the proposed significant maturity date, to move rapidly by a number of years. We do not want schemes to be forced to re-plan unnecessarily because the duration of liabilities measure is potentially volatile. Consequently, regulation 4 has been revised to prescribe a fixed date, which will be 31 March 2023, on which economic assumptions used to calculate maturity must be based. This will have the effect of fixing the economic conditions used which will reduce volatility in the duration of liabilities measure. This will provide trustees with greater stability when planning and managing scheme funding and investments and offer flexibility to pursue plans that are not inextricably tied to fluctuations in economic conditions. Regulation 4(1)(b) provides for the duration at which a scheme reaches significant maturity to be set out in TPR’s Code. In the updated Code of Practice TPR will reassess and revise the point of significant maturity, based on this revised regulation and updated analysis.

Relevant date

3.4. Many respondents thought setting a minimum requirement for the relevant date to be no later than the end of the scheme year that the scheme is estimated to reach significant maturity would work and would ensure best practice is extended across all schemes.

3.5. The Government was pleased to learn that many schemes already have a long-term date by when they expect to reach their long-term target but remains concerned that some still do not. We note that some schemes currently calculate their long-term date in a different way to that envisaged in the draft Regulations. However, we recognise that for schemes which are already past the point of significant maturity, the Regulations require information to be provided as at the relevant date, and there is little value in requiring increasingly historic data. The revised Regulation 8(4) will therefore provide for the relevant date for schemes already past significant maturity to be the effective date of the valuation to which the Funding and Investment Strategy relates. Amendments to Regulation 4, reduce volatility in the date of significant maturity (due to market conditions), this reduction in volatility will make it easier for schemes to align funding plans with a relevant date.

3.6. We recognise that cash balance schemes have shorter durations of liabilities because these schemes pay lump sums rather than pensions benefits over the longer term. We have therefore amended regulation 4(1)(b) to make clearer that TPR is able to set a different date of significant maturity for different types of schemes, and we understand that TPR is considering setting a different specified duration for determining when schemes with Cash Balance benefits reach significant maturity. These Regulations also provide a partial exemption at regulation 8(5) and 8(6) for schemes that have cash balance sections which operate alongside Collective Defined Contribution (CDC) pension sections from the requirement to adopt the ‘relevant date’ within the Regulations. This is because these schemes provide only part of the total benefits whilst the CDC section provides the pension, and the Government is committed to supporting the development and implementation of CDC schemes.

Open Schemes

3.7. Respondents were concerned about the impact the draft Regulations would have on open schemes and suggested that they would be forced to de-risk investments unnecessarily.

3.8. The Government values the contribution that open schemes make to their members and to the UK economy. It is important we implement a scheme funding regime that works well for all open schemes. During the passage of the Pension Schemes Act 2021, the then Minister for Pensions gave a commitment to Parliament to ensure that secondary legislation would work effectively for open schemes and that open schemes with a strong sponsoring employer that are immature and have managed their risk appropriately should not be forced into an inappropriate de-risking journey.

3.9. Some schemes are open and sufficient new members are joining to ensure that the scheme is not maturing. Some respondents made the case that such schemes should be allowed to plan on the basis that they will never mature, as they will always have new members joining. If open schemes are not able to plan and fund on the basis that they will not imminently begin to mature, this could lead to them having to plan to reach low dependency earlier and, in turn, increase the value of their technical provisions. The Government does not think it is reasonable to assume that open schemes will remain open indefinitely and will have an evergreen covenant. History shows us that even seemingly very robust employers can and do become weaker and may become insolvent unexpectedly. The Government believes a more reasonable balance can be struck by allowing schemes to take account of future accrual but requiring them to have regard to the strength of the financial ability of the employer to support the scheme when calculating their significant maturity.

3.10. The draft Regulations were intended to deliver this policy, but respondents told us we needed to be explicit that open schemes can take account of new entrants and future accrual. We have engaged extensively with representatives of open schemes to understand their concerns in detail and have inserted a new regulation 4(5). This will explicitly allow open schemes to make a reasonable allowance for new entrants and future accrual in scheme maturity calculations, subject to the trustees’ assessment of the financial ability of the employer to support the scheme. This approach still allows flexibility and opportunity for schemes to benefit from the covenant of their sponsor and their characteristics as an open scheme which means that it is reasonable, for some schemes, to plan and fund on the basis that the scheme will not begin to mature soon.

3.11. The revised Regulations support our intention that open schemes should be able to thrive and will allow trustees the freedom to invest in a way that best fits the circumstances of their scheme, including, where appropriate, being able to invest in a significant proportion of long-term return seeking assets.

Low dependency investment allocation

3.12. The principle that mature schemes should have low dependency on the sponsoring employer, which underpins the concept of a low dependency investment allocation, gathered broad support amongst respondents. However, many respondents suggested that specific elements of the definition of a low dependency investment allocation were open to a range of possible interpretations, which could lead to unintended consequences such as excessive de-risking and investment herding behaviour.

3.13. The Government is committed to delivering a scheme funding regime that strikes a reasonable balance between the security of member benefits and employer affordability. We agree that the original formulation of low dependency investment allocation could be interpreted in a way that is excessively restrictive resulting in a perceived lack of independence for trustees to invest in higher growth seeking assets as part of a diverse portfolio. The interpretation taken by TPR in their draft Code, which most respondents agreed with, is aligned with the intention we had with these Regulations. We have revised the draft regulation 5 to make this clearer.

3.14. Concerns mainly focussed on the ‘broadly matched’ principle, noting that it could be interpreted as a requirement to match asset and liability cash flows almost fully. This was not our intention. Our focus on cashflow generation was to ensure that schemes after significant maturity, which are required to disburse a substantial proportion of their assets in benefit payments each year, mitigate the risk of having to disinvest from volatile investments at inopportune moments, potentially crystallising losses and leading to a downward asset spiral. Many respondents highlighted that the second part of the formulation of Low Dependency Investment Allocation – the “highly resilient test” – would be sufficient on its own to meet our aims.

3.15. The Government recognises the concerns that, taken together, the draft regulations 5(2)(a) and 5(2)(b) that were consulted on could be interpreted as overly restricting the types of assets schemes could invest in once they reached their relevant date. We have amended the Regulations to align their interpretation with that set out by TPR in their draft Code. So that schemes are clear that they can invest a reasonable amount in a wide range of assets beyond government and corporate bonds after significant maturity, we have removed draft regulation 5(2)(a) that required assets to be invested in such a way that the cashflow from the investments broadly matches with the payment of pensions and other benefits under the scheme. We believe this revision of regulation 5 will provide sufficient flexibility to allow schemes to continue to invest an appropriate proportion of funds in growth assets and will be welcomed by stakeholders. We are confident that the revised definition of low dependency investment allocation will continue to deliver the policy aim and will ensure trustees can invest in a wide range of assets including productive finance.

Low dependency funding basis

3.16. Many respondents thought the definition of low dependency funding basis was appropriate and would be effective. They agreed schemes should limit reliance on the employer covenant by the time they are significantly mature. Other respondents considered that while the definition may be appropriate for many schemes it would not be appropriate to make this a requirement for all schemes and for those that still have access to a strong covenant even after their relevant date.

3.17. We have listened to the concerns and on balance the Government has decided not to make any changes to this measure. The low dependency principle is a cornerstone of the new requirements and key to the policy intent to help manage the risks to scheme members of downside events impacting a significantly mature scheme with increasing liquidity demands and contracting time horizons. Given that we have made changes to the low dependency investment allocation measure, as described above, we think this strikes a reasonable balance.

Trustees’ independence in making investment decisions.

3.18. The Government has listened to concerns raised about the impact the draft Regulations could have had on trustees’ independence in making investment decisions. We recognise the concern that these Regulations could have an impact on trustees’ independence to invest scheme funds in the interests of their members. As noted above, our intention was that these regulations should not change the power of the Trustees to set investments (after consultation with the employer). However, we have re-drafted the regulations to make this clearer. The reference in Schedule 1 to investments on and after the relevant date is now contained in Schedule 1(c) as an objective to make clear that the Funding and Investment Strategy does not create a regulatory requirement to invest in this way. However, we would note that the funding obligation mentioned in Schedule 1 paragraph (3) that, on and after the relevant date the scheme must be at least 1:1 funded on a low dependency funding basis, is a regulatory requirement. To support these changes, we have made some additional amendments relating to the information required in the Statement of Strategy.

3.19. The revised draft Regulations will not change trustees’ duties in respect of investment decisions, they simply set out the requirements for a plan to be in place for this. TPR will expect that trustees’ investment strategies will, in practice usually be broadly consistent with those set out in the funding and investment strategy, as the rationale behind the requirements for the funding and investment strategy should also underpin trustees’ actual investment decisions. However, this does not mean they should always be identical as there may be good reasons for some divergence. This means that while trustees and sponsors may agree on the Funding and Investment Strategy, it is for trustees alone to decide on the actual investments made. The Government believes this is entirely appropriate. However, as the sponsor has a responsibility to fund the scheme, it is right that they are involved in the planning of the Funding and Investment strategy, in the same way that they are involved in setting the scheme’s Technical Provisions. But trustees must have the discretion to respond to changing circumstances and to act in the best interests of all the members. We think the Regulations achieve this important balance.

Investment and funding risk at and after significant maturity

3.20. We asked for views on whether more risk taking could be permitted after significant maturity, provided this could be supported by high-quality contingent assets and is limited to, for example, five per cent of total liabilities. Most respondents thought the Regulations could go further in allowing limited additional risk where it is supported by contingent assets. Others argued that any limit would be arbitrary and instead, trustees should determine the appropriate level of investment risk their scheme could take. Some stakeholders also raised the concern that schemes in surplus on a low dependency funding basis would be restricted to invest that surplus in line with the low dependency investment allocation which would be disproportionate for a scheme that is overfunded.

3.21. After careful consideration, we revised paragraph 3(2)(b) now paragraph 1(c) of Schedule 1 to ensure that the objective to invest in line with the Low Dependency Investment Allocation clearly does not apply to surplus funding. We have concluded that no further amendments are required as the amended regulations offer the right balance of flexibility while achieving the policy aims. Any additional risk will not be factored into the low dependency investment allocation, and so will not impact on the low dependency funding basis.

Mitigating against trapped surplus

3.22. Concerns were raised during the consultation that the requirement for schemes to have a funding level of 1:1 on a low dependency funding basis could result in surpluses becoming trapped. As the scheme is run on a prudent basis in most scenarios the assets should outperform the liabilities enabling promises to be met and so a surplus to be generated. The Government’s publication ‘Options for Defined Benefit schemes: a call for evidence has asked for views on how investing surpluses can be encouraged and how they can be best utilised. The Government responded to that Call for Evidence on 22 November 2023^{[footnote 3]}.

Strength of the employer covenant

3.23. The strength of the employer covenant is the primary factor for trustees’ and managers’ decisions in determining the maximum level of funding risks their scheme can take as it moves along its journey plan. The Government welcomes respondents’ support for a definition of the strength of employer covenant as well as the broad agreement with the way it has been defined by draft regulation 7. We have carefully considered the concerns raised during the consultation and made a number of key revisions to resolve these:

i. ‘Legal obligation’ and ‘now and in the future’ – we have revised draft regulation 7(4) to make clear that the strength of the employer covenant is the employer’s financial ability in relation to its legal obligation to support the scheme. The regulation recognises that the employers immediate and future financial ability to support the scheme should be assessed.

ii. Sub-delegation to TPR’s code – we have removed references to the ‘Code’ at draft regulation 7(4)(a) and (b), as we agree that it is important to maintain the primacy of the Regulations.

iii. Contingent assets – we recognise concerns that draft regulation 7(7)(a) we consulted on may imply that contingent assets are limited to guarantees. We have, therefore, removed this requirement from Regulation 7.

Risk along the journey plan

3.24. The ‘journey plan’ is the period from the current date to the relevant date (a scheme that has reached the relevant date will not have a journey plan). Some stakeholders raised a concern about the clarity as to whether the journey plan was part of the Funding and Investment Strategy (FIS) and if so, what aspects. Our intention was to ensure that the journey plan was part of a scheme’s Funding and Investment Strategy but to not disrupt the trustees’ primacy in deciding exactly what investments are to be made.

3.25. We have revised draft regulation 12 to bring the journey plan into the funding and investment strategy (in relation to funding but not in relation to investment). This will ensure that technical provisions must be consistent with the funding journey plan, as well as the low dependency funding basis as at the relevant date, but not interfere with the trustees’ primacy over investment decisions. We have also revised the definition of the journey plan at draft regulation 2, to make it clear that it starts at the effective valuation date of the actuarial valuation to which the funding and investment strategy relates. We think this approach strikes a reasonable balance. It ensures that liabilities are calculated consistently with the journey plan to scheme maturity, and therefore delivers clearer funding standards and gives an appropriate regulatory grip in respect of the calculation of the scheme’s liabilities. But at the same time, it ensures that trustees have ample scope to invest in the best way in the light of circumstances to give members the best prospects of their benefits being paid in full.

3.26. Paragraphs 4 and 5 of Schedule 1 we consulted on applied supportability principles to the maximum levels of investment risk and funding risk that trustees or managers can take as the scheme moves along its journey plan (the period from the current date to the relevant date). The principles are that the level of risk taken:

a. is dependent on the strength of the employer covenant. More risk can be taken where the employer covenant is stronger, and less risk can be taken where the employer covenant is weaker; and

b. how near the scheme is to the relevant date. More risk can be taken where a scheme is a long way from reaching the relevant date, and less risk can be taken where a scheme is near to reaching the relevant date.

3.27. The Government welcomes broad support for the principles in paragraphs 4 and 5 of Schedule 1. We have deleted paragraph 4 we consulted on so that it is clear that investments are not part of the Funding and Investment Strategy and that employers do not need to agree them.

Liquidity

3.28. The principle in paragraph 5 of Schedule 1 requires schemes to be invested in assets with sufficient liquidity to enable them to meet expected cash flow requirements and to make reasonable allowance for unexpected cashflow requirements.

3.29. The Government welcomes the broad agreement with the new liquidity principle, and we have maintained it within the revised Regulations. We consider the principle to be an important addition to the existing liquidity requirement of regulation 4(3) in the Occupational Pension Schemes (Investment) Regulations 2005. As the majority of DB schemes continue to mature, it is essential that they have sufficient liquidity to be able to pay pensions as they fall due. The Liability Driven Investment (LDI) episode demonstrated the importance of schemes’ preparedness to meet unexpected cashflow requirements, including collateral calls.

3.30. The new liquidity principle not only reaffirms the need for schemes to have sufficient liquidity, but also allows illiquid assets to continue to be part of a diversified portfolio.

3.31. However, respondents were concerned about the administrative costs on schemes planning for liquidity over too long a timeframe, therefore we have decided to delete paragraph 6(1) of Schedule 1 we consulted on which required them to anticipate liquidity over the journey plan and after the relevant date. TPR will only need information on how trustees have factored liquidity into their current strategy. We think this approach strikes an appropriate balance.

Funding and investment strategy level of detail

3.32. Draft regulation 12 sets out the level of detail trustees or managers of defined benefit pension schemes must include in their funding and investment strategy. Views were mixed. Many respondents agreed the level of detail required for the funding and investment strategy was reasonable and proportionate. Other respondents had concerns over the level of detail required. These concerns centred on the three requirements in draft regulation 12:

a. The way in which scheme benefits would be provided over the longer term.

b. Expected maturity of the scheme at the relevant date.

c. Asset allocation at the relevant date.

3.33. We have revised draft Regulations to move paragraphs (8, 9, 10, 11 and 12) from Schedule 2 to regulation 12, as we think that it will be useful for trustees to determine how the funding position will develop over the journey plan. While trustees will be able to revise the funding and investment strategy, this revision requires trustees to consider scheme funding over the longer term. Trustees will now be required to provide a description of the journey plan from the funding level at the date of the actuarial valuation, as set out in paragraph 2.16 above, to which the Funding and Investment Strategy relates to the intended funding level at the relevant date. This includes, the discount rates and other assumptions used in calculating the scheme’s technical provisions, and an assessment of how the trustees expect those to change over time in order to reach the intended funding position as at the relevant date.

Chapter 4 – Statement of strategy

Government response

Level of detail

4.1. The policy aim for the statement of strategy is to ensure better trustee and manager engagement on their plans for the long-term and how they are managing risks, as well as ensuring a better understanding and accountability between trustees and managers of schemes and TPR. By having more and better-quality information upfront, TPR will be able to regulate more effectively and efficiently. The statement of strategy is in two parts and requires schemes to set out their funding and investment strategy (Part 1) and supplementary matters (Part 2).

4.2. In Part 2 of the statement of strategy, scheme trustees or managers must provide an assessment of whether their funding and investment strategy is being successfully implemented, or if there are any remedial actions, they need to take account of to get back on track - in addition to key risks and mitigations, key decisions and lessons learned. Additional matters to be included in Part 2 include: how maturity is expected to change over time and information related to the assumptions for new entrants and future accruals; an assessment of employer covenant strength and an explanation of the extent to which the funding and investment strategy remains appropriate.

4.3. After considering the views of respondents of what assessments or explanations should be evidenced by Trustees and further work by TPR, the Government has made amendments to the level of detail and the supplementary matters schemes need to provide within the statement of strategy, with a view both to practicality and reducing administrative burden. To reduce burden, we have made three further amendments to draft regulation 17.

4.4. First, we have at regulation 17 inserted a power to allow TPR to exercise discretion as to the level of detail required to enable TPR to take a scheme specific approach to requesting information. For example, TPR may ask schemes for less detail or not ask for an item of information at all.

4.5. Second, we have also removed the requirements to evidence discount rates and why the funding and investment strategy remains appropriate. The Government considers that it is best that schemes need only to provide a description of these items and they do not need to be evidenced. Further detail will be set out in TPR’s Funding Code.

4.6. Third, we have added a requirement to provide a summary of the valuation in the statement of strategy and removed the existing requirement to submit such a summary with a recovery plan. This should enable TPR to remove similar questions from the scheme return and so remove duplication.

Requirements for chair of trustees

4.7. New section 221B (6) and (7) of the Pensions Act 2004 requires a chair of the trustee board to sign-off the statement of strategy and where the board does not have a chair, they must appoint one. The appointment of the Chair of the trustee board encourages best practice and allows for accountability of the trustee board and the decisions they make in respect of their funding and investment strategy. Draft Regulation 16 lists the requirements for the chair. We welcome the view that the Regulations introduce appropriate requirements for the scheme trustee board when appointing a chair.

4.8. We agree with respondents that the draft regulation 17(d), which we consulted on, in relation to a scheme established under section 67 of the Pensions Act 2008, is not needed and we have removed this from the revised Regulations.

Statement of Strategy to the Pension Regulator

4.9. Stakeholders were concerned about administrative burdens. We investigated further what information should be sent with actuarial valuations in extensive engagement with a range of stakeholders, and in discussions with the Regulator. On balance the Government has decided that it is reasonable and appropriate for TPR to be informed when schemes update either the funding and investment strategy or the statement of strategy. Consequently, we have revised draft regulation 19 to require the statement of strategy to be sent to TPR as soon as reasonably practical after it has been prepared or revised, whether or not this in or out of cycle with an actuarial valuation.

Chapter 5 – Amendments to the Occupational Pension Schemes (Scheme Funding) Regulations 2005

Government response

Calculation of technical provisions, actuarial valuations and reports

5.1. Regulation 20(4) amends the Scheme Funding Regulations to include a new requirement for the actuarial valuation to include: the actuary’s estimate of the level of the scheme’s maturity at both the effective valuation date and the relevant date; when the scheme is expected to reach significant maturity; and the actuary’s estimate of the funding level, on a low dependency funding basis as at the effective valuation date.

5.2. Most respondents thought the requirements set out in draft regulation 20(4) would work in practice. There were suggestions, however, that they would be costly for schemes to implement due to the complexity of the calculations involved and that the requirements would work but only if the definition of significant maturity was changed so that the measure was less sensitive to market volatility. Respondents argued that, if schemes’ relevant dates are too changeable, the requirements would not support trustees with long term planning. A small number of respondents recommended open and immature schemes be exempt from these requirements.

5.3. Trustees or managers of a pension scheme determine which methods and assumptions are to be used when calculating the scheme’s technical provisions but are required to follow certain principles set out in the Occupational Pension Schemes (Scheme Funding) Regulations 2005 (the Scheme Funding Regulations). Section 222(2A) of the Pensions Act 2004 requires technical provisions to be consistent with funding and investment strategy. We have removed draft regulation 20(3) which we consulted on, as this was unnecessary duplication. The requirement for consistency is clearly set out in section 222(2A), and it is therefore unnecessary (and potentially unhelpful) to have a similar, but not identical, provision in the regulations.

5.4. As set out above, we have introduced a new amendment to Regulation 8 of the Scheme Funding Regulations to remove the requirement at Regulation 8(7)(a) to send a summary of the information contained in the actuarial valuation to TPR – this is to avoid duplication.

Recovery plans

5.5. Trustees or managers of a pension scheme are required to prepare or revise a recovery plan following an actuarial valuation if the scheme is deemed to be in deficit. Regulation 8(2) of the Scheme Funding Regulations prescribes matters which trustees or managers must take account of in preparing or revising a recovery plan. These matters include the scheme’s asset and liability structure, risk profile and liquidity requirements, as well as the age profile of members. Section 226(3A) of the Pensions Act 2004 allows Regulations to define more clearly what is appropriate in the context of a recovery plan. The Government agrees with respondents that the matters prescribed by existing Regulations remain relevant for trustees and managers to take account of when determining or revising recovery plans. These matters remain in place.

5.6. Draft regulation 20(8), as we consulted on, would amend the Scheme Funding Regulations to require the trustees or managers, when determining whether a recovery plan is appropriate, to follow the principle that funding deficits must be recovered as soon as the sponsoring employer can reasonably afford. This was designed to balance the needs of pension schemes with the other various demands on employers’ available capital. Respondents were concerned about giving primacy to draft regulation 20(8) over existing matters, as they thought it did not consider other reasonable uses of employers’ available capital - in particular, employers’ investment in the sustainable growth of their businesses. We recognise the importance of investment in UK business to drive innovation and growth and want to enable such investment wherever possible. Consequently, we have amended draft regulation 20(8) now regulation 20(4) to include a requirement for trustees to consider the impact of the recovery plan on the employer’s sustainable growth as a matter to be taken account of when preparing or revising a recovery plan.

5.7. A key intention behind the introduction of secondary legislation is to clarify what is meant by an ‘appropriate’ recovery plan to support trustee and employer negotiations, so that TPR can intervene more effectively to protect members’ benefits when needed. Giving the reasonable affordability principle primacy over other matters to take into account, will deliver on that intention. After careful consideration, we have concluded that further amendments are not required to the Regulations to achieve this result, as reasonable affordability has primacy, as a principle, over other matters to be considered (such as the impact of the recovery plan on the employer’s sustainable growth).

Multi-employer schemes

5.8. Draft regulation 20(5) extends the existing provisions in Schedule 2 to the Scheme Funding Regulations, so that where the legislation treats individual sections of a multi-employer scheme as if they were separate schemes for the purposes of the Scheme Funding Regulations and Part 3 of the Pensions Act 2004, then they will also be treated in that way for the purposes of the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024. It is important the Regulations work in practice for all multi-employer pension schemes, and so the Government welcomes support from those who responded to question 22 of the consultation. Draft regulation 20(5) will remain in the Regulations without amendment.

Chapter 6 – Business burdens and regulatory impacts

Government response – Business burdens and regulatory impacts

Impact assessment

6.1. Many respondents thought the information presented in the impact assessment was too narrow in its assessment of the costs. There were various suggestions for a wider set of costs that should be considered in the impact assessment. Other respondents thought it was difficult to comment on any potential costs associated with the Regulations until they had sight of TPR’s Code.

6.2. An Impact Assessment considering the business impacts of requirements for defined benefit pension scheme trustee boards to appoint a Chair and to regularly prepare, review and submit a statement of strategy to The Pensions Regulator was published alongside the Pension Schemes Act 2021. We updated the impact of meeting the funding and investment strategy in the Impact Assessment that accompanied the consultation on the Regulations. However, we were clear that the full costs could not be determined until the detail of all components of the scheme funding regime were known. This included TPR’s draft Code, which contained more detailed guidance and specification on how schemes can comply with legislative requirements.

6.3. Following the publication of TPR’s draft Code^{[footnote 4]}, we have now published a full and updated Impact Assessment^{[footnote 5]}. This analysis outlines possible changes in schemes’ deficit repair contributions (DRC’s), accounting for potential changes in trustee behaviour which affects the assumptions used for the calculation of the technical provisions but also of changes in schemes’ asset allocations. We estimate around 1,200 schemes are expected to pay more DRCs – with their payments increasing around £7.1bn over the next 10 years. However around 1,400 schemes are expected to pay less in DRCs, with their payments decreasing by around £7.4bn. Hence overall, our modelling finds on aggregate, DRCs will be around £0.3bn lower over the 10-year period following the commencement of the Regulations. Whilst we have not updated the Impact Assessment since 31 March 2021, given recent movements in market conditions since that date and the subsequent improvement in overall funding levels, if an assessment were undertaken as at the end of 2023, we expect that these figures would be significantly lower. Given the scale of assets held by DB schemes, the Impact Assessment also considers the wider macroeconomic effects of legislative change. While there is no clear evidence base in which to make a quantitative assessment of these impacts, they will be monitored closely by the Secretary of State for the Department for Work and Pensions and through regular assessment of the data collected by the Office for National Statistics, the Pension Protection Fund and TPR. A report will be published at least every 5 years.

6.4. The updated impact assessment concludes that the implementation of the funding and investment strategy and statement of strategy requirements, including familiarisation, will total around £36.8 million (or on average around £7000 per scheme). There would then be ongoing costs of £5.4 million per annum (or on average £1100 per scheme per annum). While we appreciate that costs will vary significantly between schemes, we do not think the requirements will increase administrative burdens excessively. Those who do not already have a long-term objective for securing member benefits, or one that is only aspirational, will be more greatly affected in their implementation of the new requirements. However, the updated Impact Assessment demonstrates there will be resulting benefits to the security of member benefits, the PPF, and scheme governance and accountability.

Annex A – Analysis of responses

Funding and investment Strategy

Scheme maturity

Question 1

Draft regulation 4(1)(b) provides that a scheme reaches significant maturity on the date it reaches the duration of liabilities in years specified by TPR’s revised DB Funding Code of Practice.

i. Do you think that it would be better for the duration of liabilities at which the scheme reaches significant maturity to be set out in the Regulations rather than the Code of Practice?

ii. If you think that the point of significant maturity should be specified in Regulations, do you agree that a duration of 12 years is an appropriate duration at which schemes reach significant maturity?

1.1. We received 73 responses to this question.

1.2. Most respondents said it would be better to set the duration of liabilities at which a scheme reaches significant maturity in the Code, and many respondents addressed the duration of liabilities measure of scheme maturity more broadly.

1.3. The consultation period overlapped with historically sharp movements in government bond markets and many respondents indicated the duration measure, due to its sensitivity to these movements, may be too volatile. Respondents highlighted the potential for schemes’ durations to reduce significantly within short time periods when gilt yields rise rapidly and suggested this could force schemes to sell assets at an impracticable pace to meet the low dependency requirements set out in the Regulations. Most respondents thought setting the duration of liabilities at which a scheme reaches significant maturity in the Code would provide schemes with greater flexibility in respect of long-term planning, particularly when responding to changes in market conditions.

1.4. Several respondents suggested that, to reduce the impact of market conditions, the duration at which schemes reach significant maturity should be less than 12 years, or the impact of setting significant maturity at duration 12 should be reviewed. Some respondents suggested the point of significant maturity should be set within a range - for example between 10 to 12 years - while others thought the calculation of duration should be changed to assume a fixed real gilt yield.

Low dependency investment allocation

Question 2

Do you think that the definition of low dependency investment allocation provided by draft regulation 5 is appropriate and will it be effective?

1.5. We received 71 responses to this question.

1.6. A significant number of respondents thought the definition of low dependency investment allocation provided by draft regulation 5, subject to interpretation, was appropriate and would be effective. They supported the principle that once schemes are mature they should have low dependency on the sponsoring employer.

1.7. However, many respondents suggested the definition was open to a range of possible interpretations, which could lead to unintended consequences. We received a wide range of responses dependent on each respondent’s interpretation of the draft regulation. A large number of respondents suggested the definition of low dependency investment allocation was overly restrictive.

1.8. Many respondents were concerned that draft regulation 5(2)(a) would require investment portfolios to be entirely cashflow-matched, which would provide too great a restriction on the types of assets schemes can invest in. There were also concerns that draft regulation 5(2)(b) was overly prudent and would require schemes to de-risk investments unnecessarily.

1.9. Several respondents suggested that, together, draft regulations 5(2)(a) and 5(2)(b) would lead to all schemes adopting similar investment strategies. Some respondents argued this could increase systemic risks to DB pension schemes and the wider UK economy, with some pointing to market events in September 2022 as an example of such risks. These respondents proposed that a wider definition of low dependency investment allocation should be used to allow schemes to invest in a wider range of cash generative assets.

Low dependency funding basis

Question 3

Do you think that the definition of low dependency funding basis provided by draft regulation 6 is appropriate and will it be effective?

1.10. We received 70 responses to this question.

1.11. Some respondents thought the definition of low dependency funding basis provided by draft regulation 6 was appropriate and would be effective. They agreed schemes should limit reliance on the employer covenant by the time they are significantly mature.

1.12. However, several respondents considered that - while the definition may be appropriate for many schemes - it would not be appropriate to make this a requirement for all schemes. A number of respondents suggested schemes should be able to continue to rely on the support of the employer covenant at and after significant maturity. They argued that failing to consider the employer covenant in funding decisions would unnecessarily drive up the cash costs of providing for accrued benefits.

Strength of the employer covenant

Question 4

i. Do you agree with the way that the strength of employer covenant is defined?

ii. Are the matters which trustees or managers must take into account when assessing it, as provided by draft regulation 7, the right ones?

iii. Does draft regulation 7(4)(c) effectively capture the employer’s broader business prospects?

1.13. We received 71 responses to this question.

1.14. In response to part ‘i’ of question 4, many respondents broadly agreed with the way the strength of the employer covenant was defined in draft regulation 7, with some welcoming the inclusion of a definition within legislation for the first time. Several respondents suggested the following two matters should be included in the definition, contending they are fundamental strands to the definition of employer covenant:

• the employer’s ‘legal obligation’ to support the scheme
• that such support is to be provided ‘now and in the future’.

1.15. Some respondents were concerned that the requirements for contingent assets to be considered in the assessment of a scheme’s employer covenant strength would be difficult for trustees to meet. They argued that regulation 7 would unnecessarily restrict schemes’ use of contingent assets.

1.16. In response to part ‘ii’ of question 4, some respondents thought the matters which trustees or managers must take into account when assessing the strength of the employer covenant, as provided by draft regulation 7, are the right ones and welcomed further details due in the draft Code and further covenant guidance.

1.17. A few respondents thought assessing the cash flow of the employer would be difficult for schemes where a sponsoring employer was operating in the charitable sector and that the financial strength of these employers would not correlate to cashflows.

1.18. Several respondents indicated that predicting the likelihood of insolvency would be difficult for many schemes given the long lifespan of pension scheme liabilities. Some respondents suggested schemes should also be able to consider the likelihood of an employer recovery from an insolvency event.

1.19. A number of respondents thought there was not a definitive list of matters for trustees to consider when assessing the financial ability of the employer and that the draft regulation did not provide sufficient breadth to capture other factors that might be important dependent on a scheme’s individual circumstances.

1.20. In response to part ‘iii’, a small minority of respondents thought draft regulation 7(4)(c) did not effectively capture the employer’s broader business prospects, stating the terminology was not widely understood by the pensions industry. Instead, they suggested using the term, prospects. However, a majority of respondents considered part ‘iii’ difficult to answer without sight of TPR’s draft Code.

1.21. A small number of respondents thought it was not appropriate for the Regulations to subdelegate to the Code here. They suggested that the issues raised would need to be set out in the regulation itself or set out in the Code without the Code being referenced.

Relevant date

Question 5

Does it work in practice to set a minimum requirement for the relevant date to be no later than the end of the scheme year that the scheme is estimated to reach significant maturity?

1.22. We received 65 responses to this question.

1.23. Many respondents thought setting a minimum requirement for the relevant date to be no later than the end of the scheme year that the scheme is estimated to reach significant maturity would work in practice and would ensure best practice is extended across all schemes. However, several respondents were concerned about how it would work in practice given the potential volatility of duration of liabilities as a measure of scheme maturity. Others thought setting a minimum requirement would be impractical for some schemes if, as a result of changes in market conditions, schemes were forced to alter their investment allocations and to seek additional contributions at short notice.

1.24. Some respondents thought the minimum requirement would not work in practice and, instead, proposed that trustees or managers set the relevant date based on the specific circumstances of their scheme. They suggested this would offer schemes greater flexibility than would be provided by this minimum requirement.

1.25. Many respondents thought this minimum requirement might not work for schemes which are not maturing. They suggested it would drive up funding costs, through increased technical provisions, if open schemes were required to assume that they would reach their relevant dates at some point in the future. Some respondents indicated the Regulations should include an allowance for open schemes to take account of new entrants when setting the relevant date. A few respondents added that the minimum requirement would not work for schemes that have already surpassed the relevant date, as there is no relevance in continuing to set a date that is in the past.

Question 6

Does your scheme already have a long-term date and how is it calculated?

1.26. We received 51 responses to this question.

1.27. We received a wide range of responses to this question, featuring comments on the broader universe of schemes as well as individual schemes. One respondent offered that, broadly, schemes tend to fall into a specific set of categories.

1. A long-term date that has been explicitly set by the scheme and in many cases, broadly aligned with the concept of significant maturity.

2. An implicit long-term date by virtue of the use of a pre- and post-retirement discount rate approach, such that the long-term date is when the scheme’s membership only comprises pensioner members.

3. No long-term date.

1.28. Of those schemes or sponsoring employers that responded to the consultation, many said they (or the scheme they sponsor) did have long-term dates, and that these were calculated in a variety of ways. Some suggested their long-term date broadly aligned with the draft Regulations, while others provided different methods of calculating their long-term date or stated that their long-term date did not interact with their investment strategy in the way envisaged by the draft Regulations.

Question 7

Where the funding and investment strategy is being reviewed out of cycle with the actuarial valuation, would it be more helpful to require it to align with the most recent actuarial report?

1.29. We received 57 responses to this question.

1.30. Many respondents indicated that where the funding and investment strategy was being reviewed out of cycle with the actuarial valuation, it would be more helpful to require it to align with the most recent actuarial report – particularly where trustees are seeking to make minor amendments.

1.31. However, a significant number of respondents said there should be additional flexibility regarding the information referred to in a review of the funding and investment strategy. They suggested the Regulations should allow for the most up-to-date information available to be used.

Minimum requirements on and after the relevant date

Question 8

Do you think that these minimum requirements are sensible and will provide additional protection for the accrued pension rights of scheme members?

1.32. We received 73 responses to this question.

1.33. A number of respondents thought that the minimum requirements were sensible and agreed with the principle of schemes reaching a state of low dependency on the sponsoring employer. Some also stated that these minimum requirements will provide additional protection for the accrued pension rights of scheme members and would be beneficial in ensuring member benefits are delivered in the long-term.

1.34. However, a few respondents suggested that, while the funding requirements are sensible and would provide additional protection to scheme members, the investment requirements are inflexible. Some offered that schemes should be able to take a greater level of investment risk when they are significantly mature.

1.35. Several respondents thought the minimum requirements on and after the relevant date would not work for a minority of schemes that are both underfunded and have weak employer covenants. They suggested these schemes should be able to take increased levels of investment risk to be able to provide for the accrued pension rights of scheme members. Some respondents suggested there would be a risk that some employers would feel they have no option but to pay potentially unaffordable contributions.

1.36. Many respondents suggested that transitional arrangements may be required for these schemes that find they are not compliant with the minimum requirements once the Regulations come into force.

Question 9

i. Should such limited additional risk at and after significant maturity be permitted, if supported by contingent assets? If so, to what percentage of total liabilities should this be limited?

ii. What additional risks to members’ benefits might be posed as a result, and what safeguards should apply to protect members?

1.37. We received 73 responses to this question.

1.38. In response to part ‘i’, respondents were in broad agreement that schemes should be able to take additional risk at and after significant maturity. A difference in views arose as to what such additional risk should be supported by. Most respondents thought the draft Regulations should go further than only allowing for limited additional risk where it is supported by contingent assets.

1.39. A considerable number of respondents suggested a strong employer covenant should, alongside contingent assets, be able to support additional risk-taking at and after significant maturity. A smaller number of respondents suggested that surplus funding should also be able to support schemes in taking additional investment risk at and after significant maturity.

1.40. Many respondents argued additional investment risk should not be limited at all if supportable, stating that any limit would be arbitrary. Instead, trustees should determine the appropriate level of investment risk their scheme can support. Other respondents suggested additional risk at and after significant maturity should only be limited through requirements around the quality of contingent assets supporting such risk.

1.41. In response to part ‘ii’, respondents suggested requirements around the quality of contingent assets could also be used to safeguard members, highlighting examples of contingent assets they considered to be of sufficient quality such as cash in escrow. Some respondents thought legal enforceability should be a key requirement and suggested the inclusion of appropriate legally binding triggers requiring a flow of funds into the scheme, based on funding level for example.

Investment risks on journey plan

Question 10

Do you think that the provisions of paragraph 4 of Schedule 1 will allow appropriate open schemes to continue to invest in growth assets as long as that risk is appropriately supported?

1.42. We received 62 responses to this question.

1.43. Several respondents thought the provisions of draft paragraph 4 of Schedule 1 would allow appropriate open schemes to continue to invest in growth assets as long as that risk was appropriately supported. They indicated the provisions captured the characteristics of open schemes which are not maturing and were clear that immature schemes with a long period to significant maturity would be able to take greater investment risk, subject to the strength of the employer covenant. Some concluded that open schemes which are not maturing would not need to de-risk unnecessarily.

1.44. Whilst respondents generally thought the provisions in draft paragraph 4 would not preclude open schemes from investing in growth assets, they suggested the concern was on the funding- rather than the investment-side. Many respondents suggested that if the draft Regulations do not allow for new entrants in the measure of scheme maturity, then open schemes will be required to fund as if they will de-risk their assets at some point in the future. They argued this could increase the immediate costs to open schemes and potentially result in further closures.

1.45. Several respondents contended that open schemes could dedicate considerable resources to developing funding and investment strategies that would not be implemented if the scheme’s relevant date moves out at each valuation. Some respondents proposed the Regulations should not be applied to open schemes which are not maturing to ensure they would still be able to invest in growth assets. For the same reason, other respondents recommended that draft paragraph 4 of Schedule 1 should be disapplied to such schemes.

Risk in relation to calculation of liabilities on journey plan

Question 11

Do you think that the principles in paragraphs 4 and 5 of Schedule 1, requiring funding risks and investment risks to be linked primarily to the strength of the employer covenant, are sensible?

1.46. We received 70 responses to this question.

1.47. Many respondents thought the principles in draft paragraphs 4 and 5 of Schedule 1, requiring funding and investment risks to be linked primarily to the strength of the employer covenant, were sensible. Some respondents thought these principles were consistent with current integrated risk management approaches.

1.48. However, there were concerns that the principles in draft paragraphs 4 and 5 of Schedule 1 could lead to a move away from a scheme specific funding regime. Some respondents suggested the draft principles were too restrictive and could excessively constrain the level of investment risk schemes would be able to take along the journey plan. A couple of respondents suggested the draft principles 4 and 5 should include that a scheme’s funding level, or even surplus funding, should be able to support additional investment being taken alongside the strength of the employer covenant.

1.49. A number of respondents indicated that the draft principles might not work in the case of an underfunded scheme with a weak employer covenant. They suggested such schemes may be reliant on taking a greater level of investment risk, with the potential for higher returns, to substitute for employer contributions which are not forthcoming, and that this may not be considered appropriate in respect of the Regulations.

Liquidity

Question 12

Do you think that the new liquidity principle set out in paragraph 6 of Schedule 1 is a sensible addition to the existing liquidity requirement of regulation 4(3) of the Occupational Pension Schemes (Investment) Regulations 2005?

1.50. We received 63 responses to this question.

1.51. The majority of respondents were broadly in agreement that the new liquidity principle set out in draft paragraph 6 of Schedule 1 was a sensible addition to the existing liquidity requirement of regulation 4(3) of the Occupational Pension Schemes (Investment) Regulations 2005.

1.52. Whilst not objecting to the addition of the new liquidity principle, a section of respondents thought it did not add anything significant to the existing liquidity requirement. A minority of respondents were concerned that the new liquidity principle would represent a significant change from the existing requirement and might deter investment in illiquid assets.

Question 13

Will the matters and principles set out in Schedule 1 enable the scheme specific funding regime to continue to apply flexibly to the circumstances of different schemes and employers, including those schemes that remain open to new members?

1.53. We received 66 responses to this question.

1.54. The majority of those who responded to question 13 thought the matters and principles set out in Schedule 1 will not continue to apply flexibly to the circumstances of different schemes and employers. Many considered the requirement for schemes to reach low dependency on the sponsoring employer by the relevant date to be too restrictive.

1.55. Several respondents suggested the matters and principles set out in Schedule 1 would not work for open or immature schemes. However, a minority of respondents thought the matters and principles set out in Schedule 1 would enable the funding regime to continue to apply flexibly and remain scheme specific.

Funding and investment strategy – level of detail

Question 14

Is the level of detail required for the funding and investment strategy by draft regulation 12 reasonable and proportionate?

1.56. We received 60 responses to this question.

1.57. The consultation responses we received set out varied views on this question. Many respondents agreed the level of detail required for the funding and investment strategy by draft regulation 12 was reasonable and proportionate. Other respondents did have concerns over the level of detail required. These concerns centred on the three requirements in draft regulation 12:

a. The way in which scheme benefits would be provided over the longer term.

b. Expected maturity of the scheme at the relevant date.

c. Asset allocation at the relevant date.

1.58\ A small number of respondents were concerned about the first of these requirements provided by draft regulation 12(a). Some suggested that while this requirement is reasonable and proportionate for most schemes, open schemes should have the option to state that they intend to remain open indefinitely.

1.59. There were similar concerns regarding the second of these requirements provided by draft 12(b), with respondents suggesting the requirement did not add value and therefore was not needed. A small number of respondents suggested that schemes should, instead, provide a description of their current maturity and how this would develop over time. Other respondents thought it was not reasonable or proportionate for many open schemes, and stated these schemes are unlikely to be able to determine a relevant date if they are not maturing.

1.60. Many respondents were concerned about the third requirement provided by draft regulation 12(c). Again, respondents stated this was not reasonable for open schemes which are not maturing. Some offered it would be difficult for open schemes to predict - well into the future – the make-up of their asset allocations and any rebalancing required, particularly as views on what constitutes a suitable asset allocation could change persistently over time. Other respondents provided that the proportions of different asset classes held will change as the values of those assets move up and down. Some respondents also suggested the requirement will not work for schemes, rather than stipulate the types of assets they will invest in, target specific levels of returns.

1.61. In relation to draft regulation 12 there was further concern that the regulation should not require too much detail from schemes given that trustees already need to provide significant information on their scheme’s investments within the Statement of Investment Principles.

Question 15

Do you think the requirement for high level information on expected categories of investments will impact trustees’ independence in making investment decisions in the interests of scheme members?

1.62. We received 62 responses to this question.

1.63. Many respondents thought the requirement for high level information on expected categories of investments will impact trustees’ independence in making investment decisions in the interests of scheme members. A number of respondents had concerns that the proposals were a departure from existing practice and suggested that, if the funding and investment strategy must be agreed with the employer, there was scope for confusion over how the requirements would interact with trustees’ investment powers.

1.64. Some respondents argued that the requirement to obtain employer agreement on high-level information on expected categories of investments could strain trustee-employer relations. There was concern that, where relations are already strained, this requirement could lead to prolonged and potentially costly discussions.

1.65. However, other respondents thought the requirement for high level information on expected categories of investments would not impact trustees’ independence in making investment decisions in the interests of scheme members. Some respondents welcomed the requirement and suggested trustees should be encouraged to share high level investment information with the sponsor.

Determination, review and revision of funding and investment strategy

Question 16

Are the requirements and timescales for determining, reviewing and revising the funding and investment strategy in draft regulation 13 realistic?

1.66. We received 55 responses to this question.

1.67. A majority of respondents agreed the requirements and timescales for determining, reviewing and revising the funding and investment strategy were realistic. However, several respondents indicated that a particular interpretation of ‘material change’ in draft regulation 13(2)(e) could lead to frequent reviews of the funding and investment strategy becoming necessary, particularly in periods of market volatility, which would be burdensome for some schemes.

1.68. A number of respondents thought there should be flexibility to extend the timescales where appropriate. For some, this is only after the first valuation once the Regulations come into force, while for others it is in a broader set of circumstances such as when a valuation leads to a change in the investment strategy.

Statement of strategy

Part 2 of the statement of strategy – level of detail

Question 17

Are there any other assessments or explanations that trustees should evidence in Part 2 of the statement of strategy?

1.69. We received 56 responses to this question.

1.70. The majority of respondents to the consultation either did not answer question 17 or said they did not think any other assessments or explanations should be evidenced by trustees in Part 2 of the statement of strategy.

1.71. However, several respondents did provide suggestions for other assessments or explanations that trustees should evidence. These included:

• a section on recovery plans including expected employer contributions, the extent of contingent employer contributions and the extent of reliance on asset outperformance.
• a statement on sustainability and how environmental, social and corporate governance principles have been incorporated into trustee investment decisions.
• evidence on the reasons the scheme has fallen behind its target timeframe to reach low dependency.
• how trustees have taken account of the sustainable growth of the business.
• information on any expense allowance.
• level of leverage calculated on a consistent basis or collateral yield headroom calculated on a consistent basis.
• the extent to which the covenant assessment has taken into account contingent assets.

1.72. Other respondents thought there were already too many assessments or explanations that trustees are required to evidence in Part 2 of the statement of strategy, and that this could create an additional administrative burden for some schemes – particularly for smaller schemes.

Requirements for chair of trustees

Question 18

Do you agree that these are the appropriate requirements for the scheme trustee board when appointing a chair? Are there any other conditions that should be applied?

1.73. We received 51 responses to this question.

1.74. The overwhelming majority of respondents agreed these are the appropriate requirements for the scheme trustee board when appointing a chair and did not suggest any other conditions that should be applied. There was a suggestion that consideration be given to the definition of professional trustee body in regulation 17(b) given that professional trustees are sometimes paid by the sponsoring employer rather than the scheme. Some respondents also recommended that draft regulation 17(d) is not needed and could be removed.

Amendments to existing legislation

Actuarial valuations and reports

Question 19

We would like to know if you think these requirements will work in practice?

1.75. We received 52 responses to this question.

1.76. Most respondents thought the requirements set out in draft regulation 20(4) would work in practice. There were suggestions, however, that they would be costly for schemes to implement due to the complexity of the calculations involved. A few respondents stated the requirements would work but only if the definition of significant maturity was changed so that the measure was less sensitive to market volatility. Respondents argued that, if schemes’ relevant dates are too changeable, the requirements would not support trustees with long term planning.

1.77. A small number of respondents recommended open and immature schemes be exempt from these requirements. They argued these requirements are not relevant to such schemes.

Recovery plan

Question 20

Do you consider that the matters prescribed by regulation 8(2) of the Occupational Pension Schemes (Scheme Funding) Regulations 2005 remain relevant for trustees or managers to take account of when determining or revising recovery plans? If so, why and how are they relevant to the setting of appropriate recovery plans?

1.78. We received 58 responses to this question.

1.79. The majority of those who responded to question 20 thought the matters prescribed by the existing Regulations remain relevant for trustees or managers to take account of when determining or revising recovery plans.

1.80. A small minority of stakeholders thought the matters were, in the main, not relevant for trustees or managers to take account of when determining or revising recovery plans but that they do have relevance in some cases.

1.81. A few respondents recommended the new affordability principle at draft regulation 20(8) be included as a matter within existing Regulations. There was a suggestion that member affordability should also be included alongside the existing matters, which would reflect the circumstances of schemes with shared cost arrangements.

Question 21

Do you consider that the new affordability principle at draft regulation 20(8) should have primacy over the existing matters, if they do remain relevant?

1.82. We received 67 responses to this question.

1.83. A small minority of respondents considered that the new affordability principle at draft regulation 20(8) should have primacy over the existing matters. This largely focused on the frailty of an employer covenant; respondents argued sponsoring employers should repair scheme deficits while they can afford to do so.

1.84. However, a majority of respondents indicated that the new affordability principle at draft regulation 20(8) should not have primacy over the existing matters. It was suggested the new affordability principle is too vague and could be interpreted as requiring the recovery of scheme deficits at a pace and scale of detriment to the sponsoring employer’s business. Some respondents were concerned the new affordability principle could place strain on employer-trustee relationships if there is disagreement over what is reasonably affordable.

1.85. Many respondents argued the new affordability principle at draft regulation 20(8) would work in contrast to TPR’s statutory objective to minimise any adverse impact on the sustainable growth of an employer. Some respondents recommended that the sustainable growth of the employer should be mentioned explicitly within the regulation.

1.86. Several respondents stated that if employer contributions were to increase as a result of the new affordability principle being introduced, some schemes might become overfunded. Respondents contended trapped surpluses could arise as a result, especially if there is no allowance for expected investment returns when setting deficit repair contributions.

Multi-employer schemes

Question 22

Will the requirements in draft Regulations 20(9) work in practice for all multi-employer pension schemes?

1.87. We received 31 responses to this question.

1.88. There were a limited number of responses to question 22 but, of those who did respond, most agreed the requirements in draft regulation 20(9) would work in practice for all multi-employer pension schemes.

1.89. A few respondents also suggested the Regulations needed to be clearer in setting out how they would apply to specific types of sectionalised multi-employer pension scheme arrangements, such as those which are only sectionalised on a notional basis.

Business burdens and regulatory impacts

Impact assessment

Question 23

Do you agree with the information presented in the impact assessment for the funding and investment strategy?

1.90. We received 50 responses to this question.

1.91. There were a limited number of responses to questions 23, 24 and 25. Of those who responded to question 23, many did not necessarily disagree with the information presented in the impact assessment but considered it to be too narrow in its assessment of the costs.

1.92. There were various suggestions for a wider set of costs that respondents suggested should be considered in the impact assessment. These included the following:

• changes in schemes’ deficit repair contributions
• effects of changes in schemes’ asset allocations
• funding changes for open schemes
• Macroeconomic impacts

1.93. Some respondents disagreed with the information presented in the impact assessment, stating that the familiarisation costs were underestimated. They contended there would be a larger number of individuals that would need to familiarise themselves with the requirements than assumed, and schemes and employers would have to pay professional advisers to support with their familiarisation. A few respondents thought the impact assessment overestimated the number of schemes with a long-term objective, and that it did not correlate with their scheme or the schemes they advise.

1.94. Other respondents thought it was difficult to comment on any potential costs associated with the Regulations until they had sight of TPR’s Code.

Question 24

Do you expect the level of detail required for the funding and investment strategy to increase administrative burdens significantly?

1.95. We received 53 responses to this question.

1.96. The majority of those who responded to question 24 thought the level of detail required for the funding and investment strategy would increase administrative burdens significantly, particularly for smaller schemes.

1.97. However, a few respondents suggested that - while there may be a significant increase in administrative burdens in the initial years after the Regulations come into force - this impact would decrease over time. A small number of respondents offered that, for schemes that do not already have a funding and investment strategy, the benefits of developing one would warrant the increased administrative burden that comes with it.

Question 25

Do you agree with information presented in the impact assessment for the statement of strategy, referenced in paragraph 6.1?

1.98. We receive 27 responses to this question.

1.99. Again, there were a limited number of responses to question 25. Of those who responded, many reiterated their responses to question 23 that the impact assessment did not assess some wider potential impacts of the draft Regulations. Respondents also reiterated that the burden would be greater for smaller schemes and that the costs would become clearer once they have sight of the draft Code.

1.100. A few respondents disagreed with the information presented. They suggested the costs for schemes to carry out employer covenant assessments should be included. Some also contended that the familiarisation costs were understated as significant time would be needed for familiarisation given the number of changes being made to the scheme funding regime.  

Annex B – list of respondents

1. 100 Group
2. ACMCA Limited
3. Allen & Overy LLP
4. Aon plc
5. AQA Pension Scheme
6. ARC Benefits Limited
7. Associated Society of Locomotive Engineers and Firemen, National Union of Rail, Maritime and Transport Workers, and Transport Salaried Staffs’ Association
8. Association of Consulting Actuaries Limited
9. Association of Pension Lawyers
10. Association of Professional Pension Trustees
11. Atkin Trustees Limited
12. AXA UK Group Pension Scheme
13. Barnett Waddingham
14. Berthon Boat Co Retirement Benefits Scheme
15. British Airways Pensions
16. Broadstone
17. BT Group plc
18. BT Pension Scheme Trustees Limited
19. Buck
20. Cadent Gas Pension Trustee Limited
21. Capital Cranfield Holdings Limited
22. Cardano Group
23. CFA Society of the United Kingdom
24. Church of England Pensions Board
25. Compass Group Pension Plan
26. Confederation of British Industry
27. Deloitte LLP
28. DHL GBS (UK) Limited
29. Dun & Bradstreet (UK) Pension Plan
30. Employer Covenant Practitioners Association
31. Eversheds Sutherland (International) LLP
32. EY Parthenon
33. First Actuarial LLP
34. Freshfields Bruckhaus Deringer LLP
35. GAM UK Limited Pension and Life Assurance Scheme
36. General Electric
37. Herbert Smith Freehills LLP
38. Hewlett Packard Pension Association
39. Hogan Lovells International LLP
40. Hymans Robertson LLP
41. IBM Pensions Trust
42. Institute and Faculty of Actuaries
43. Institute for Family Business
44. Institute of Chartered Accountants in England and Wales
45. Institute of Chartered Accountants of Scotland
46. Isio Group Limited
47. Lane Clark & Peacock LLP
48. Law Debenture Pension Trust Corporation plc
49. Law Society of Scotland
50. Luxfer Group UK Pension Trustee Limited
51. Mercer Limited
52. Mpac plc
53. National Grid plc
54. National Housing Federation
55. N M Rothschild & Sons Limited and Trustee of The NMR Pension Fund
56. Norcros Security Plan
57. Norton Rose Fulbright
58. Penfida Limited
59. Pension SuperFund
60. Pensions and Lifetime Savings Association
61. Pensions Management Institute
62. Pension Protection Fund
63. Punter Southall Pensions Solutions Limited
64. Railways Pension Trustee Company Limited
65. Redington
66. Royal Mail
67. Royal Mail Pension Plan
68. RSM UK
69. Sacker and Partners LLP
70. SEI
71. Society of Pension Professionals
72. SAUL Trustee Company
73. Tesco plc Pension Scheme Trustee
74. TfL Pension Scheme
75. The Old Bushmills Distillery Co Ltd
76. Trades Union Congress
77. UK Power Networks Holdings Limited
78. Unipart Group of Companies Limited, Trustee of the Unipart Group Pension Scheme, and Trustee of the Unipart Group Retirement Benefits Scheme
79. Unite the Union
80. Universities Superannuation Scheme
81. Universities UK
82. University of Cambridge
83. University of Oxford
84. Willis Towers Watson plc
85. XPS Pensions Group
86. Zephyrus Partners Limited
87. Zurich Financial Services Limited and Zurich Financial Services UK Pension Trustee Limited
88. Individual A
89. Individual B
90. Individual C
91. Individual D
92. Individual E

Annex C – The draft Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024)

Read the draft Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024

1. See Fast Track and our regulatory approach: consultation document – The Pensions Regulator ↩

2. See Options for Defined Benefit schemes: a call for evidence – (publishing.service.gov.uk) ↩

3. See Options for Defined Benefit schemes: a call for evidence – GOV.UK (www.gov.uk) ↩

4. See Draft DB funding code of practice – The Pensions Regulator ↩

5. See the draft Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 ↩