1 Paragraph 4(a)(ii) of Schedule 3 to the 2022 Regulations and paragraph 4(a)(ii) of Schedule 3
to the 2025 Regulations
Financial reserves and haircuts
CDC code in force: 31 July 2026
- Apart from a minimum amount for liquidity, we do not prescribe the type of assets that a scheme must hold in any financial reserves that it maintains. However, trustees must apply a discount, or ’haircut’, to the current or book value of the assets held for reserving purposes1. We consider the asset types in the table at the end of this module to be appropriate for including in a scheme’s financial reserves.
- The haircut reduces the market or book value of an asset or holding for the purposes of the costs, assets and liquidity plan (CALP) or business plan. For example, an asset with a current market value of £100 and a haircut of 20% would be valued at £80 for the purposes of the financial reserves. This means that the current value of assets held by the trustees, or over which they have first call, in their financial reserves will be greater than that set out in the CALP.
- Trustees should choose the haircut that most closely represents each type of asset in their financial reserves. There are different haircut values for each class of asset, reflecting different levels of risk depending on the length of time before they are expected to be called on. Trustees should consider this when assessing the assets they hold in their reserves and the liquidity they require.
- The haircuts applied to assets may influence the choice of assets that the trustees include in their financial reserves.
- Trustees and scheme proprietors should aim to provide an estimate of the risk appetite they take to their financial reserves. This is because the value of assets and the capita and liquidity requirements will fluctuate over time. We need to know if schemes are holding the bare minimum according to their estimates, or if they are holding a prudent buffer to account for such movements.
- Unless otherwise stated, we assume all asset prices are in pounds sterling. Any currency risk that an asset is exposed to, or cost of hedging activities, should be assessed within the CALP.
- All marketable assets held as part of the financial reserves should be admitted to trading on regulated markets. There should not be a significant level of non-marketable or illiquid assets held in financial reserves.
- Schemes should maintain reserves greater than those required by this code as a prudential measure to maximise the probability of being able to meet the costs of a triggering event.
- Schemes may hold their entire reserves in cash, but they should ensure that the CALP allows for the effects of inflation. These allowances may include general increases in prices of goods and services, and in particular wage costs. Schemes should take account of prevailing factors when setting these expectations and should not necessarily default to a long-term average.
- We will expect any debt instruments the scheme holds in its financial reserves to be of investment grade, as determined by a recognised ratings agency.
- Financial commitments or guarantees issued by participating employers or group companies (single-employer CDC schemes), or scheme proprietor (multi-employer CDC schemes), will be assessed for the ability of the relevant entity to support that commitment or guarantee. We will also assess the time needed to deliver that support.
- Schemes with financial reserving requirements covered by employer or scheme proprietor guarantees should aim to build their financial reserves to a point where they fully meet the amount they require. Trustees building their assets in this way should regularly monitor their progress towards holding their full financial reserves.
| Asset class | Description | Haircut | |||
|---|---|---|---|---|---|
| Running costs | Financial reserves for costs arising | ||||
| Financial reserves within 1 month of a triggering event | Financial reserves within 2 and 12 months of a triggering event | Financial reserves after more than 12 months of a triggering event | |||
| Scheme funds | Assets not attributable to members that are available to pay scheme costs | As underlying assets | |||
| Cash | Cash including fixed term deposits from eligible counterparties and money market funds | 0% | 0% | 3% | 6% |
| Guarantee from a PRA regulated firm | Legally enforceable guarantees issued by a scheme proprietor, participating employer or group company which are not considered as debt instruments | 10% | 0% | 5% | 5% |
| Scheme proprietor (or participating employer) guarantee | Legally enforceable guarantees issued by a scheme proprietor, participating employer or group company which are not considered as debt instruments | 10% | 25% | 10% | 10% |
| Scheme revenues | Revenues generated by the scheme from charges on assets (annual management charge) or members, based on most recent audited accounts | 5% | 10% | 20% | 30% |
| Scheme income | Income received from the scheme proprietor (or participating employers in the case of single-employer CDC schemes) for covering costs, based on most recent audited scheme accounts | 10% | 10% | 20% | 30% |
| Government and public sector debt | Government debt (for example, bonds or gilts) such as debt issued by central banks, government agencies and local government | 25% | 5% | 5% | 5% |
| Supranational institution debt | Supranational institution debt | 25% | 10% | 10% | 10% |
| Corporate debt | Corporate bonds, including bonds issued by banks or credit institutions | 50% | 25% | 25% | 25% |
| Asset-backed securities | Bonds or notes backed by financial assets, excluding mortgage loans | 75% | 25% | 25% | 25% |
| Equities | Shares listed on a regulated market | 0% | 50% | 25% | 10% |
| Gold or precious metals | Certifications and bullion | 90% | 75% | 75% | 75% |
| UK government issued loans | Guarantees issued by government departments (for example, the Department for Work and Pensions) which are not considered as debt instruments | 0% | 0% | 0% | 0% |
| Property assets | Scheme office premises or other property available on first call | - | 90% | 70% | 50% |
| Insurance | Policies held by trustees to cover normal scheme running costs | 10% | 0% | 3% | 6% |
| Wind-up insurance |
Policies held by trustees to cover the costs of a triggering event | - | 90% | 3% | 6% |
| Loans | Loans provided by banks | - | 10% | 115% | 130% |