Technical provisions

This code of practice applies to activities related to valuations with effective dates on and after 22 September 2024. For activities related to valuations with effective dates before 22 September 2024, refer to the 2014 DB funding code (PDF, 401kb, 51 pages).

1. At each valuation the scheme’s technical provisions (TPs) must be determined. This is the amount required, on an actuarial calculation, to make provision for the scheme’s liabilities.
2. The assumptions to be used for the purpose of calculating the TPs are determined by the trustees, which must be consistent with the scheme’s funding and investment strategy. The extent of this requirement is set out below.
3. The scheme actuary will determine the TPs using those assumptions and the scheme data.
4. The trustees and actuary should discuss any concerns they have over the quality of the valuation data.

Role of the scheme actuary

5. The trustees must take advice from the actuary on the assumptions to be used.
6. The actuarial valuation must incorporate the actuary’s certification of the TPs calculation. The actuary is not responsible for choosing the method and assumptions or certifying that they are appropriate.
7. The trustees should have good reasons if they decide not to follow the actuary’s advice. If they instruct their actuary to certify the TPs using an approach the actuary considers a clear failure to comply with Part 3 of the Pensions Act 2004¹, we expect the actuary to report that certification to us.
8. In addition, if the actuary does not believe that the assumptions chosen for the TPs could be considered consistent with the associated funding and investment strategy, we would also expect them to report that to us.

Setting the assumptions for TPs

9. The economic and actuarial assumptions used to calculate the TPs must be chosen prudently, allowing an appropriate margin for adverse experience. The mortality assumptions and demographic assumptions must be chosen using prudent principles.
10. The TPs must be calculated in a way that is consistent with the funding and investment strategy².
11. Where the effective date for the valuation falls after the relevant date, the assumptions used for the TPs should be the same as or stronger than those in the low dependency funding basis.
12. Where the effective date for the valuation falls before the relevant date, the TPs must reflect the funding and investment strategy. We expect this to happen in two ways.
    1. In relation to the period following the relevant date, the assumptions should be determined so that they are consistent with the use of the same or stronger assumptions than those used in the low dependency funding basis.
    2. In relation to the period before the relevant date, the assumptions should be consistent with the planned evolution of the notional investment allocation, as set out in the journey plan.
13. The relevant date should be determined with reference to the principles explained in the relevant date and significant maturity module.
14. As noted in that section, where an open scheme has not reached significant maturity, the trustees can use assumptions for future accrual, new entrants, or both to estimate when significant maturity will be reached. Using such assumptions will mean that an open scheme can be expected to take longer to reach significant maturity than an equivalent closed scheme. Trustees of such schemes can choose to reflect this in the relevant date, journey plan and the assumptions used to calculate TPs. As a result of the longer time periods, the TPs for an open scheme can be lower than those of an equivalent closed scheme.
15. The principles in this section do not limit trustees that are adopting more prudent TPs from adopting the low dependency funding basis at a point before the relevant date.
16. The individual assumptions used should be chosen consistently with the overall level of prudence targeted for the TPs. The trustees must consider whether, and to what extent, account should be taken of a margin for adverse deviation when choosing individual assumptions.
17. We would expect the TPs to include any liabilities expected to be paid by insured assets, where these assets are included and valued in the relevant scheme accounts.

Individual assumptions

18. The economic assumptions assumed in the TPs may include:
    1. discount rates
    2. RPI and CPI inflation
    3. inflation-related pension increases – these are pension increases related to inflation but with a maximum level, minimum level, or both
19. In addition, assumptions for pay increases in open schemes are often linked to the RPI or CPI assumptions.
20. The economic assumptions should be set consistently with each other.
21. The factors that need to underlie economic assumptions, the investment returns on individual asset classes or inflation assumptions are almost entirely independent of the scheme. They are driven by the return on risk-free assets or broader economic and financial factors.
22. When determining the discount rates, the expected future return on the assets presumed to be held for the purposes of the statement of strategy over the entire period of the scheme’s journey plan and after relevant date, should be allowed for.
23. The discount rates chosen should have regard to material factors that may affect investment returns over the relevant time horizon, such as climate change and other systemic trends.
24. Our general expectation is that yield curves should be used in determining economic assumptions. If the trustees consider it appropriate, the assumptions derived in this way can be summarised as single equivalent discount rates. This general expectation applies particularly to larger schemes where they are more able to rely on projected cashflows, as these schemes are less prone to concentration risk than smaller schemes. This makes the use of the yield curve in deriving assumptions more appropriate. It also applies particularly to schemes before the relevant date where the journey plan expects gradual de-risking over time, and this is reflected in the discount rates, and to schemes that have a high level of hedging.
25. Where the inflation assumption is derived from market expectations of future inflation, the trustees may adjust the market derived value to set the future inflation assumption, for example by using an ‘inflation risk premium’. The level of such an adjustment should depend on the investment strategy and the extent to which the liabilities are matched against movements in inflation.
26. The principles used in setting salary increases, CPI inflation and pension increases in the low dependency funding basis (see the expectations for setting assumptions in the low dependency funding basis section) may also be relevant for the TPs, although the assumptions themselves may be set differently. Therefore, the trustees may also want to refer to this section.
27. In addition, we would expect that many of the demographic assumptions used in the low dependency funding basis will also be used in the TPs. Therefore, the trustees should also consider our expectations on setting demographic assumptions in the section of this code on expectations for setting assumptions in the low dependency funding basis. Trustees should pay particular attention to assumptions about future mortality.

Assets

28. For the purposes of determining the funding level, the scheme should use the assets from the relevant accounts.
29. Where these include and value insured assets, a value for those assets should be included and calculated using the TPs assumptions.

Cost of future accrual

30. When deciding on the appropriate level of contributions in respect of future accrual, we expect trustees to consider the risks to the scheme in allowing for future service, noting that once earned, accrual becomes additional TPs. Therefore, we expect trustees to be satisfied that the level of contributions paid for the provision of future accruals should not compromise the security of accrued benefits.
31. Trustees should be satisfied that, based on the level of contributions agreed for future service, the overall risk of the scheme is supportable, including allowing for the level of future accrual being earned. We would expect that, after considering the provision of future service, the trustees would be satisfied that the scheme would still be expected to be compliant with legislation and continue to meet the principles of this code for funding and investment in the future.
32. For open schemes in surplus, the surplus may be able to be used to fund or part fund future accrual in the scheme. However, we would expect the trustees to carefully consider whether allowing the surplus to be used in this way is appropriate, noting their powers and what is allowable under the scheme rules and considering the equitable treatment of their membership.

Legal references

¹ Part IV of The Pensions (Northern Ireland) Order 2005

² Section 222(2A) of the Pensions Act 2004 [Article 201(2A) of The Pensions (Northern Ireland) Order 2005]