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Funding and investment

The funding of defined benefit pension schemes is a complex area. Advisers have a crucial role to play to support trustees and employers in carrying out their functions.

This page provides information on where you can find further guidance on covenant, funding and investment related matters.

Key points

  • Read Code of practice 3: Funding defined benefits if you advise trustees on funding, covenant and investment related matters.
  • Trustees should understand, monitor and manage their risks in an integrated way and you should be mindful of this when providing advice.
  • Help trustees adopt a proportionate approach.
  • Assessing the strength of the covenant now and in the future should be a key aspect of trustees’ approach. 

Approach to funding

Trustees should follow a number of key funding principles as set out in Code of practice 3: Funding defined benefits. These include working closely and openly with the employer and seeking an appropriate funding outcome that reflects a reasonable balance between the need to pay promised benefits and minimising any adverse impact on an employer’s plans for sustainable growth (and therefore its long-term ability to support the scheme).

Risk taking can be acceptable but it’s vital that trustees and the employer understand the risks being taken. Due to the extent to which covenant, investment and funding decisions interact with one another, trustees should adopt a proportionate and integrated approach to assessing, monitoring and addressing risks across these three areas.

As an adviser you should:

  • make sure your advice to trustees and employers can be easily understood
  • be mindful of the fact that trustees will have to join up the advice they receive across covenant, investment and funding-related matters in order to understand overall risk – so be prepared to work transparently and collaboratively with other advisers
  • help trustees adopt a proportionate approach under which the resources committed are in line with the benefits they’re likely to bring.

For more information go to:

Integrated risk management

Integrated risk management (IRM) is an approach that can help trustees to identify, manage and monitor the factors that affect the prospects of meeting their scheme's funding objectives.

The output of the IRM approach should inform discussions between the trustees and employer and the decisions they make relating to their strategy for meeting their objectives.

IRM involves examining how employer covenant, investment and funding risks relate to and are affected by each other. It also considers what to do if risks materialise.

IRM guide and checklist

Our IRM quick guide and checklist, aimed at smaller schemes who may have limited resources, highlight how trustees could benefit from IRM and how to get started. These resources should be used alongside the full IRM guidance.

IRM quick guide
PDF 126KB , 4 pages
How to get started with integrated risk management and how your scheme could benefit from it.
IRM checklist
PDF 89KB , 3 pages
Help meet your main objectives as a trustee by applying an integrated risk management approach to your scheme.

Employer covenant

Understanding the current strength of the employer covenant and how it could change in the future is key in helping trustees decide the appropriate level of risk when deciding their investment and funding strategies.

Key aspects of the covenant assessment include:

  • identifying the statutory employer for the scheme
  • understanding the legal robustness of the employer’s obligations to the scheme and its ability to meet them
  • taking a proportionate approach
  • considering a range of factors such as the employer’s trading and balance sheet position or forecast profit and cash generation
  • understanding how the employer’s plans to invest for sustainable growth may affect the employer covenant
  • regularly monitoring the covenant as it can change rapidly.

For more information go to:

Investment strategy

Trustees’ investment strategy must be consistent with their funding objectives and risk appetite, the scheme’s liquidity needs and the employer’s position, including the strength of the covenant. They should monitor investment performance and also their investment strategy to ensure that it remains appropriate given the scheme’s and employer’s circumstances.

For more information go to:

Valuing schemes

Trustees must commission a full actuarial valuation at least every 3 years. Advising actuaries should:

  • advise trustees on the appropriate method and assumptions to use to value the scheme and their impact on the scheme, taking account of the degree to which the employer can support a range of likely adverse outcomes
  • help trustees understand the impact of volatility and the importance of using evidence-based assumptions
  • provide trustees with an estimate of the scheme’s solvency
  • advise trustees on the contents of the scheme’s statement of investment principles and schedule of contributions
  • certify the technical provisions calculation and the schedule of contributions, and submit the certification to us using our online service Exchange or notify us if you think the approach taken by trustees in the technical provisions or schedule of contributions fails to comply with legal requirements.

Online service
Exchange

For more information on valuing schemes go to:

Annual funding statements

Our annual funding statement provides guidance to those undertaking valuations. It's relevant to all DB schemes but is primarily aimed at those who are currently undertaking valuations. An annual funding statement sets out our view in relation to the risks facing schemes with effective valuation dates for that particular year.

You can find current and previous annual funding statements, along with supporting analysis, in our statements section.

Recovery plans

Trustees should put in place an appropriate recovery plan to return their scheme to full funding should their DB scheme not meet its statutory funding objective. They must obtain advice from their scheme actuary before preparing or revising this.

For more information go to: