The funding regime

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. The scheme funding regime comprises two separate, but interlinked, requirements for trustees to:
   1. plan for the long-term funding of the scheme
   2. carry out valuations showing the current funding position of the scheme
2. This module summarises these legislative requirements. Further details are set out in the rest of this code.

Long term planning

3. The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024¹ require trustees to carry out the following steps in planning for the long-term funding of the scheme.
   1. Determine a funding and investment strategy, setting out how they intend the scheme to provide benefits over the long term.
   2. Record the funding and investment strategy, and further supplementary matters, in a statement of strategy.

Funding and investment strategy

4. For the purposes of determining their funding and investment strategy, trustees must determine:
   1. how they intend the scheme to provide benefits over the long term (their long term objective)
   2. the low dependency funding target, which will include the funding level they intend the scheme to have reached on a low dependency funding basis at a particular date (known as the relevant date)
   3. the investments they intend to hold, at the relevant date
   4. the funding journey plan from the current funding position to the low dependency target, where the relevant date is in the future
5. Trustees must obtain the employer’s agreement to the funding and investment strategy, unless both of the following apply:
   1. The rates of employer contributions are determined by the trustees or managers without the employer’s agreement.
   2. Only the trustees are permitted to reduce those rates or to suspend payment of contributions.
6. In that case, the trustees are required to consult with the employer on the funding and investment strategy, rather than obtaining agreement.

Providing benefits over the long term

7. Benefits can be provided by schemes in a number of ways, depending on the circumstances of the scheme, including:
   1. running off the scheme as it matures, paying the benefits from the scheme as they fall due
   2. buying out members’ benefits with an insurer
   3. transferring the scheme assets and liabilities to a defined benefit (DB) superfund or another consolidation vehicle
8. For the purposes of the funding and investment strategy, trustees of all schemes must set a plan to reach a minimum of low dependency on the employer by the time the
   scheme is significantly mature.
9. The way trustees intend to provide benefits over the long term (the long-term objective) should be taken into account when considering the other elements of the funding and investment strategy. For example, if the strategy is to buy out benefits, the trustees may adopt a higher low dependency funding target at the relevant date.
10. However, we recognise that there may be scenarios where the long-term objective does not align with the low dependency target set out in the funding and investment strategy.
11. For example, open schemes that are open to new entrants and future accrual may have no intention of ever closing the scheme to new entrants or future accrual. However, trustees need to consider how they would provide accrued benefits for existing members over the long term if the circumstances of the scheme were to change in the future, and comply with the legislative requirement to set the scheme’s low dependency target. In practice, at each valuation, that notional date that a scheme will reach that low dependency target will keep being pushed back if the scheme remains open.

Low dependency funding basis

12. A scheme’s liabilities must be calculated in accordance with the low dependency funding basis for the purposes of the funding and investment strategy.
13. A low dependency funding basis must use actuarial assumptions. These are set on the assumption that:
    1. if the scheme was fully funded on that basis, and
    2. the scheme’s assets were invested in accordance with the low dependency investment allocation, then it would be expected that no further employer contributions would be required.
14. Further details on how trustees should approach these requirements are set out in the low dependency funding basis module.
15. By the time the scheme reaches its relevant date, it must be fully funded on a low dependency funding basis. In the funding and investment strategy, trustees are required to target a minimum funding level of at least 100% on a low dependency funding basis by the relevant date. This target funding level must be included in the funding and investment strategy. Trustees may target a higher funding level to support other long-term strategies, including buying out benefits, running on the scheme with a buffer against risks with the aim of providing improved benefits to members, or transferring into a DB superfund.
16. As the regulations require trustees to target low dependency on the employer, not no dependency, even schemes that are fully funded on a low dependency funding basis at and after the relevant date remain exposed to covenant risk if funding levels deteriorate or if there were to be an unexpected employer insolvency event. The employer covenant module sets out further detail.

Investments after the relevant date

17. For the purposes of determining or revising a scheme’s funding and investment strategy, trustees need to set an objective that, on and after the relevant date, the assets to which the minimum funding level relates are invested in accordance with a low dependency investment allocation. Trustees must take this objective into account when determining or revising the funding and investment strategy. This objective does not apply to any surplus on a low dependency funding basis. A low dependency investment allocation is an investment strategy under which the value of the assets relative to the value of the scheme’s liabilities is highly resilient to short-term adverse changes in market conditions.
18. The low dependency investment allocation is a key element of the funding and investment strategy. It acts as a notional investment allocation from which a suitable low dependency funding basis can be derived. This means a scheme that is fully funded on this basis and invested in line with the low dependency investment allocation can expect no further contributions to be required from the employer. Further detail in relation to this principles-based test is set out in the low dependency investment allocation module.
19. Trustees have a legal duty to choose investments that are in the best financial interests of scheme members and are not required to invest in line with the low dependency investment allocation on and after the relevant date. We anticipate that the scheme’s actual investment allocation will often be the same or similar to the scheme’s low dependency investment allocation, as significantly mature schemes have less capacity to make good negative investment outcomes. However, we recognise this will not always be the case. There may be good reasons not to do so, for example if an employer refuses to agree to a strengthening of the low dependency investment allocation that the trustees consider appropriate being recorded in the funding and investment strategy, or where a scheme has a material surplus after the relevant date.
20. For the purposes of the funding and investment strategy, trustees must ensure that the scheme assets will be invested on and after the relevant date in investments with sufficient liquidity. This will enable the scheme to meet expected cash flow requirements and make reasonable allowance for unexpected cash flow requirements.
21. Further details on how trustees should approach these requirements are set out in the low dependency investment allocation module of this code.

The relevant date

22. For the purposes of regulation 4(1)(b) of The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 20242, we have the power to set the duration in years or other date which defines when a scheme will reach significant maturity and this can be different for different descriptions of schemes.
23. A scheme’s relevant date is set by the trustees. For schemes that have not reached significant maturity, it must not be later than the end of the scheme year in which the scheme is expected to reach (or did reach) significant maturity (though it can be any date before this deadline). For schemes that have reached significant maturity, it will be the effective date of the actuarial valuation to which the funding and investment strategy relates.
24. The scheme actuary is responsible for estimating the date of significant maturity. This estimate must be produced by reference to the duration of the scheme’s liabilities calculated on an actuarial basis related to the low dependency funding basis. Further detail on this is set out in the relevant date and significant maturity module of this code.
25. Where a scheme has not reached the relevant date, the actuary must also estimate the expected maturity of the scheme at that (future) date.
26. Trustees can make an assumption for future accrual and new entrants when determining future maturity. This means that an open scheme can be expected to take longer to reach significant maturity than an equivalent closed scheme. As assumed risk can be taken for a longer period of time, technical provisions (TPs) for an open scheme can be lower than an equivalent closed scheme of the same maturity.

Journey plan

27. In the funding and investment strategy, trustees must plan how they intend the scheme to reach its low dependency funding target from the current funding position. This is referred to as the funding journey plan. It encompasses the evolution of the actuarial assumptions used to calculate the scheme’s liabilities as it progresses towards the relevant date.
28. When determining the funding journey plan as part of the funding and investment strategy, the actuarial assumptions need to be supportable by a suitable notional investment strategy. While we anticipate the actual investment allocation and the notional investment allocation will be the same or similar for many schemes, trustees are not required to invest in line with this notional investment strategy.
29. When determining the journey plan, trustees must ensure that the level of risk is:
    1. dependent on their assessment of the employer covenant, where more risk can be allowed for where the scheme has access to sufficient employer cash flows and contingent assets to support this level of risk
    2. subject to the above, dependent on the maturity of the scheme
30. We expect trustees’ investment plans to provide sufficient liquidity to enable the scheme to meet expected cash flow requirements and make reasonable allowance for unexpected cash flow requirements.
31. Further detail is set out in the journey planning module of this code.

Statement of strategy

32. Trustees must prepare a written statement of strategy made up of two parts.
    1. Part 1, which records the funding and investment strategy.
    2. Part 2, which records various supplementary matters (including matters related to the journey plan, how well the funding and investment strategy is being implemented, the main risks to the strategy and how they are being managed).
33. The statement of strategy must be submitted in a form set out by us. We have discretion over the level of detail required for some of the information, evidence and explanations required in Part 2 of the statement. The level of detail required will depend on the level and complexity of the risk taken.
34. Trustees must consult with the employer when preparing or revising Part 2 of the statement of strategy.
35. Further detail is set out in the statement of strategy module of this code.

Determination, review and revision

36. A scheme’s first funding and investment strategy must be determined within 15 months of the effective date of the first applicable actuarial valuation. The first applicable actuarial valuation is the first valuation with an effective date on or after 22 September 2024.
37. The funding and investment strategy must be reviewed and, if applicable, revised within 15 months of the effective date of each subsequent valuation and any other circumstances outlined in the reporting and inter-valuation requirements module.
38. Trustees must record their first funding and investment strategy in a statement of strategy. A copy must be sent to us as soon as reasonably practicable after the funding and investment strategy has been prepared or revised.
39. Whenever the funding and investment strategy is reviewed:
    1. if that review has led to a revised funding and investment strategy, Part 1 of the statement of strategy must be updated to reflect the revisions, and
    2. regardless of whether the funding and investment strategy has been revised, Part 2 of the statement of strategy must be reviewed and updated accordingly

Application

Valuations

40. Every DB scheme is subject to the statutory funding objective, which is to have sufficient and appropriate assets to cover its TPs. The TPs must be set consistently with the funding assumptions set out in the funding and investment strategy.
41. Under Part 3 of the Pensions Act 2004³, trustees must obtain actuarial valuations every year. However, trustees can choose to obtain valuations at up to triennial intervals, provided that they obtain an actuarial report for each intervening year.
42. An actuarial valuation is a written report prepared and signed by the scheme actuary, calculating the scheme’s TPs and comparing those to the value of the scheme’s assets on a specific date, known as the effective date.
43. Further detail is set out in the technical provisions module of this code.

Recovery plans

44. Where a valuation shows that a scheme did not meet the statutory funding objective on the effective date, a recovery plan must be put in place to return the scheme to full funding.
45. In determining whether the recovery plan is appropriate, trustees must follow the overriding principle that steps must be taken to recover deficits as soon as the employer can reasonably afford. Trustees must also take certain matters into account, including the impact of the recovery plan on the sustainable growth of the employer.
46. Further detail is set out in the recovery plan module of this code.

Interaction between the funding and investment strategy and valuations

47. There is a close interrelation between actuarial valuations and the long-term planning requirements. We expect trustees to consider the funding and investment strategy and valuation together as one. This is likely to be an iterative process as trustees’ understanding of their scheme and employer covenant develops, their plans for managing the scheme risks evolve, and ongoing dialogue with their employers develop. We expect trustees and employers to work collaboratively during this process. More details on this are available in the roles and responsibilities section of this module below.

Roles and responsibilities

48. It is the trustees who are responsible for taking the decisions on a scheme’s funding position and who must be comfortable certain statutory tests are met. However, trustees are required to work closely with other key parties, including the scheme actuary and sponsoring employer.
49. Roles and responsibilities are set out in detail throughout this code of practice. This section summarises our expectations for trustees and employers.

Trustees and employers

50. Trustees will need information from the employer if they are to comply with the scheme funding requirements.
51. Trustees must normally reach agreement with the sponsoring employer on the contents of the funding documents before finalising the funding approach and submitting documents to us.
52. In some instances, trustees must consult with the employer and are not required to obtain its agreement. Under the governing documentation of some schemes, the rate of contributions payable by the employer is set by the trustees without the employer’s agreement. Where that applies to a scheme, and where no person other than the trustees can reduce or suspend contributions, then the requirement to obtain the employer’s agreement to the following, under Part 3 of the Pensions Act 2004⁴ does not apply to:
    • the funding and investment strategy, as set out in the statement of strategy
    • any decision as to the methods and assumptions to be used in calculating the scheme’s TPs
    • any matter to be included in the statement of funding principles
    • any provisions of a recovery plan
    • any matter to be included in the schedule of contributions
53. Instead, trustees are required to consult.
54. We set out our expectations for trustees and employers below.

Collaborative working

55. Trustees and employers should work together in an open and transparent manner to strike the right balance between the needs of the scheme and those of the employer.
56. Trustees should engage with and obtain relevant information from the employer at an early stage in the process. Employers must provide trustees with information which the trustees and/or their professional advisers reasonably require to perform their respective duties. This includes information to assess the covenant.
57. Trustees should not be refused information to which they are entitled because of concerns over stock exchange requirements or other confidentiality issues. They should be aware of the potentially sensitive nature of the information.
58. It should be possible to address potential employer concerns, for example by trustees entering into a confidentiality agreement or using trustee sub-committees. More detail on our expectations is set out in the statement of strategy module of this code.

Managing conflicts

59. Managing conflicts of interest and duties properly is vital. Trustees should have a process in place which effectively identifies, documents, monitors and manages conflicts and potential conflicts. Our expectations are set out in the conflicts of interest module of our code of practice.
60. A conflicted trustee should consider withdrawing from negotiations, for example where the trustee is also the finance director, member of the scheme, or holds a trade union representative role.

Agreeing a funding solution

61. It is important that trustees are always able to demonstrate they have acted in line with their fiduciary duties in an impartial, independent manner when complying with the requirements of Part 3 of the Pensions Act 2004⁵. In the unlikely event the trustees are not satisfied that all of the requirements are met, they should not agree the actuarial valuation or funding and investment strategy, as this could risk compromising the scheme’s funding position and strategy.
62. Trustees should document their considerations and reasons for decisions and be in a position to be able to evidence and explain in all decisions made whether they are:
    1. required for the statement of strategy or not
    2. based on the interplay of the different information and advice strands they have received
63. We may request to see further information that is not required as part of the valuation submission.
64. When performing their duties under Part 3 of the Pensions Act 2004⁶, trustees should not take advantage of the existence of the PPF as a justification for acting in a way which would otherwise be inconsistent with those duties.

Legal references

¹ The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 (SI 2024/462) [The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations (Northern Ireland) 2024 (SR 2024/90)]

² Regulation 4(1)(b) of The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 (SI 2024/462) [Regulation 3(1)(b) of The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations (Northern Ireland) 2024 (SR 2024/90)]

³ Part IV of The Pensions (Northern Ireland) Order 2005

⁴ Part IV of The Pensions (Northern Ireland) Order 2005

⁵ Part IV of The Pensions (Northern Ireland) Order 2005

⁶ Part IV of The Pensions (Northern Ireland) Order 2005