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Response to our first defined benefit funding code of practice consultation


Published in March 2020, our first consultation set out our initial proposals for a clearer, more readily enforceable funding framework.

It aimed to scope out what the revised defined benefit (DB) funding code of practice may look like under the new, developing legislation. Focussing on the overall shape of the new funding framework, we framed our proposals within the policy intent set out in the government’s 2018 white paper as the Pension Schemes Bill was going through parliament in parallel.

We asked for views on several proposals, including:

  • our proposed regulatory approach (twin track - Fast Track and Bespoke)
  • the principles that should underpin all valuations in the revised framework
  • ideas on how these principles could be applied in practice to provide clearer guidelines

We received 127 responses from a broad range of stakeholders. Thank you to everyone who responded to our consultation and/or provided feedback throughout the process. The responses provided many good challenges and ideas, with a wide range of views from different areas of the pensions industry.

We have published our summary of responses to all our consultation questions in this document.

Summary of responses

In this section, we set out the key themes raised in the consultation and set out our high-level response. The draft DB funding code and our two consultation documents (DB code consultation document and Fast Track and our regulatory approach) published with this response go into detail. This includes where we have developed our thinking to reflect clarity on the developing legislation, responses to our first consultation, and modelling and analysis.

Introducing twin-track in our first consultation

In our first consultation, we proposed a twin-track compliance route for trustees to carry out valuations (referred to as ‘Bespoke’ and ‘Fast Track’). The approach was designed to bring greater direction and clarity to a scheme specific regime.

We introduced Fast Track as one possible valuation approach providing a potentially simplified route for the way in which we review valuations submitted to us. We proposed that if trustees met a series of parameters representing our view of a level of risk that can be tolerated, trustees would potentially not be required to provide as much explanation in the Statement of Strategy and have the comfort that The Pensions Regulator (TPR) were unlikely to engage further on their valuation.

The ‘Bespoke’ route would offer trustees more flexibility to reflect their scheme specific circumstances. Trustees would provide more evidence and explanation of their approach in their Statement of Strategy and may be subject to greater regulatory scrutiny.

There was broad support for this approach, but concerns were raised in relation to the application of twin-track and potential unintended consequences. We have set these out at a high level below and have gone into more detail in some areas in the Fast Track consultation document.

Twin-track is not mentioned in the legislation; it is a regulatory approach set out by TPR to bring greater clarity and direction to TPR’s approach to the scheme specific DB funding regime. Trustees of all schemes will be expected to meet the requirements of the legislation and follow the principles set out in the code. TPR will remain a risk-based regulator – Fast Track will allow TPR to filter schemes for further engagement more easily and we will take a proportionate approach to assessing valuations where the Fast Track parameters are not met.

Read more about our approach in our Fast Track consultation document.

Potential loss of flexibility (for example, through benchmarking the Bespoke route against Fast Track)

We initially proposed to measure risk in Bespoke funding plans against Fast Track. This proposal aimed to facilitate conversations on how to manage risk, not bring all funding approaches in line with Fast Track. Although there was broad support for our twin-track approach, there were significant concerns that there would be a loss of flexibility in Bespoke which respondents said went against the remit of the 2018 DB funding white paper. While we continue to believe that having a consistent way of measuring risk is important, we are conscious that there needs to be room for schemes to approach risk in a way that is right for them.

We are clear in our Fast Track consultation document that Fast Track does not set a ‘maximum or minimum level of risk’. While it will offer a consistent basis for TPR to assess risk and for comparing scheme funding outcomes, Bespoke valuations will not be assessed by reference to Fast Track.

Rather, we expect all trustees to follow the legislation and code principles whether the scheme meets the Fast Track parameters or not. The limit of flexibility for scheme specific funding approaches will be determined by legislation and supplemented by our code of practice.

As all trustees will be required to explain how they intend to manage and support risks, we have been considering the best approach for trustees to demonstrate compliance and measure and evidence the risks are supportable in Bespoke valuations. Trustees should focus on evidencing:

  • the funding and investment risk being supportable by the employer covenant
  • the recovery plan meeting the legislative reasonably affordable principle
  • if the scheme or employer’s circumstances are unusual or complex, how that is reflected in the plan
  • the long-term strategy being appropriate

We will engage with industry in 2023 on the information we expect to be provided in the statement of strategy.

Bespoke being second best and requiring an increased evidential burden

When we introduced the twin-track approach in our first consultation we said that both valuation approaches were equally valid if done well. However, concerns were raised that Bespoke was being positioned as a second best with increased evidential burden.

The boundaries of what is acceptable in a valuation submission are defined by the legislation and key principles set out in the code. The Part 3 Pensions Act 2004 scheme funding regime (as amended by the Pension Schemes Act 2021) continues to allow a scheme-specific approach to valuations. If trustees choose not to adopt the Fast Track parameters, the legislation gives trustees the flexibility to move away from the more narrow boundaries in Fast Track and agree a scheme-specific funding plan that meets legislative requirements. This does not mean that the approach is ‘second best’. Rather, it means that the trustees deem the more simplified and specific parameters of Fast Track not to be appropriate to their circumstances, or they are unable to fit within the boundaries for justifiable reasons.

All trustees need to submit additional information with their statement of strategy (compared to the current legislative requirements), although those taking the Bespoke submission route may need to provide greater evidence and explanation as to how their funding plan is compliant depending on the complexity of the risk taken.

This will act as a 'filter’ for TPR to consider further investigation – which we expect in most cases will be limited to a review of the details submitted to ensure that the outcome is well justified rather than meaning any direct engagement with the scheme.

Risks around where Fast Track lines are drawn (levelling down and increased costs)

We provide a detailed explanation on where we have set Fast Track parameters, how we have approached that decision and potential impacts in our Fast Track consultation document.

As discussed above, Fast Track is a regulatory approach that allows TPR to filter schemes for further engagement more easily. It is not designed to be a target for all schemes to reach. Trustees submitting a Fast Track submission will still need to be satisfied that they comply with legislation and have considered the code principles.

The new DB funding framework is not looking to change the shape of the landscape, but embed existing good practice into clear boundaries so the flexibilities of the system cannot be misused. We have developed our Fast Track regulatory approach to address the areas that we see as posing the greatest risk to us achieving our objectives.

In response to the key concerns raised in the first consultation:

  1. Schemes levelling down — We recognise that Fast Track is not a risk-free basis and would represent a higher level of risk than many schemes currently have in place and, in some cases, may encourage some levelling down or increase in risk-taking. However, we do not expect this to be significant as most schemes that are within our Fast Track parameters are aiming to manage and mitigate the risks to members and the sponsoring employer. However, we have modelled some behaviour change scenarios and this is detailed in our Fast Track and regulatory approach consultation document .
  2. Increase in the cost of DB pension provision — By the very nature of setting a Fast Track line, some schemes will be below the regulatory parameters we have set out. As stated above, the Fast Track line is just a regulatory approach adopted by TPR. For many, they will have justifiable reasons for this, and so there will be no impact of these proposals. However, some may not be able to justify their current approach in line with the requirements of the new legislation, and there may be a cost implication of this. However, we do not expect this to be significant in aggregate. We do not anticipate a significant aggregate increase in deficit repair contributions (DRC) for employers.

We have modelled some behaviour change scenarios and this is detailed in our Fast Track and regulatory approach consultation document.

Reducing general reliance on covenant support, particularly beyond the period of covenant visibility

There were concerns that our approach was looking to weaken reliance on covenant support, particularly with a greater trustee focus on covenant visibility restricting the ability to rely on covenant beyond the medium term. Our intention was not that trustees would have to assume no reliance on the covenant beyond the period of covenant visibility.

Covenant has been embedded into legislation as a key underpin for supportable risk. We expect all schemes to assess their covenant at each valuation, to understand the levels of risk they can support. We expect this assessment to be proportionate, taking into account scheme and employer specifics.

One of the challenges of the current system is the subjective nature of covenant assessments and TPR gradings - for example, what constitutes a covenant grade 2 or a covenant grade 3. Our modelling also shows there is not a strong correlation between scheme covenant ratings and funding and investment behaviours. Detailed intervention discussions turn to the value of cash flows, the value of contingent assets and the prospects of the employer and wider group.

With legislation providing greater clarity on how the strength of covenant should be assessed, we have set out in our draft code how the three fundamental pillars of covenant (the employer’s cash, prospects and contingent asset support) can support risk. We also introduce the concepts of visibility over forecasts, reliability over available cash and covenant longevity, and how these can be built into the trustee assessment of the level of funding and investment risk the employer can support over the journey plan.

We have not made fundamental changes to how covenant is assessed but have embedded existing good practice and have developed the way we expect trustees to demonstrate covenant support with reference to cash, contingent assets and prospects.

We have moved away from Fast Track lines by reference to covenant and so removed the potential volatility of a scheme’s Fast Track position should their grading change across valuations.

We will also be updating our covenant guidance to provide further detail and will consult on this in 2023.

How to reflect open schemes’ specific characteristics

In our first consultation, we set out a general principle that past service in open schemes should have the same level of security as closed schemes and that future accrual should not undermine the security of members’ accrued rights.

We continue to believe that these principles are appropriate and ones that the trustees of an open scheme should consider when making decisions.

We recognise that open schemes have different characteristics to closed schemes, and we want to make sure this is reflected in our code.

  • For a scheme in a steady state where new entrants replace leavers, we would not expect any forced investment de-risking, as long as the covenant also remains unchanged.
  • An open scheme may also find it easier to demonstrate its asset allocation has sufficient liquidity, which would enable it to invest in a less liquid portfolio than an equivalent closed scheme, as future cash contributions in respect of future service may provide the scheme with the necessary liquidity.
  • Open schemes can allow for some future accrual from existing and new entrants in projecting when significant maturity will be reached when calculating the liabilities. This will allow trustees to assume higher levels of risk-taking assets over a longer time, which will mean the technical provisions (TP) assumed may be lower than for the equivalent closed scheme. We would expect trustees to consider to what extent and for what period of time it is reasonable to make allowance for this continued accrual. In Fast Track, the assumption for the period of future accrual will be set at six years to allow for this.

We provide a high-level summary of responses to the questions in our first consultation in the next section, and a list of respondents. Details on how responses have influenced our approach can be found in the draft DB funding code of practice, the draft DB funding code of practice consultation document, and Fast Track consultation document.

Summary of responses to our DB funding consultation

Chapter 3: Proposed regulatory approach

Question 1. Twin-track compliance

We asked:

Do you think twin-track compliance is a good way of introducing objectivity into a scheme-specifc regime? What are your views on the proposals set out above? If you disagree, what do you propose instead?

You said:

Very few objected outright to twin-track, but many had concerns about how it would be implemented. A number of respondents raised concerns about where the Fast Track lines are drawn and very many were concerned that Bespoke could result in a loss of flexibility if it was measured by reference to Fast Track.

Concerns were raised over:

  • available TPR resource to assess Bespoke
  • Bespoke being burdensome and being seen as the ‘less good’ option
  • the impact on adviser costs for schemes
  • the risk of schemes levelling down to meet Fast Track
  • ow we will address post valuation experience in Fast Track
  • market distortion if we over prescribe investment strategies
  • required employer approval of the funding and investment strategy
  • how wider covenant support is assessed

Chapter 4: Employer covenant

Question 2. Insolvency risk and reliance on covenant

We asked:

Do you think the risk of member benefit reductions on insolvency is an acceptable part of the existing regime and that trustees should be able to place some reliance (whether implicit or explicit) on the employer covenant? To what extent do you think this should be the case? Do you think this risk is well understood by scheme members?

You said:

There was almost universal support for the retention of covenant in the DB funding regime. Respondents said removing all reliance on the covenant would have two key consequences:

  • Schemes would need to be immediately fully funded on a much more prudent basis. This would likely be unaffordable for many employers and significantly impact corporate sustainability.
  • The Pension Protection Fund (PPF) would be required to compensate 100% of all scheme benefits. The current PPF approach suggests some reliance on the covenant is accepted.

The vast majority did not think risk was well understood by their scheme members, although awareness had increased following high-profile employer failures.

Question 3. Integrating covenant into funding

We asked:
  1. Do you think it is better to keep the Fast Track route simpler by only factoring covenant into Bespoke (TPs and/or recovery plan)?
  2. If you think covenant should only feature in Bespoke, how do you think it should be done?
  3. If we were to integrate covenant into Fast Track guidelines, do you prefer option 1, 2 or 3 or some other approach for reflecting the employer in scheme valuations, and why? If another approach is appropriate, what do you think this should be?
You said:

There was support for integrating covenant into Fast Track through TPs to avoid a radical departure from current practice, which most respondents think is well-understood.

Covenant is seen as central to many aspects of scheme management, and most believe that removing it from Fast Track could lead:

  • sponsoring employers to stop offering covenant enhancements
  • trustees to engage less with covenant issues and risks
  • IRM approaches to fail to consider covenant risks

There was a minority view that covenant should not be integrated into Fast Track, mostly due to assessments being subjective and/or too expensive for smaller schemes. These respondents felt Fast Track should instead ensure effective scheme governance by focussing on investment risk and recovery plan structures relative to scheme maturity.

Question 4. Covenant assessment

We asked:
  1. Should a holistic approach to assessing employer covenant be retained (but with further guidance to assist trustees), or should we seek to define a more prescribed, formulaic approach?
  2. If the former (holistic approach), what amendments/clarifications to our existing guidance on covenant do you consider may be necessary? Do you agree with the ones suggested above? Is the structure and content of our existing employer covenant guidance helpful and accessible to trustees? If not, what would make it better?
  3. If the latter (formulaic approach), what do you think of the proposed RACF approach? How would you propose that covenant could be explicitly defined in a clear, consistent and measurable manner? What other metric(s) may be appropriate?
  4. Alternatively, would it be appropriate to require employer covenant to be assessed in a prescribed (formulaic) way for Fast Track purposes, and only allow for a more holistic approach under the Bespoke framework?
You said:

If covenant is retained, there was an overwhelming preference for it to be assessed holistically to take account of scheme-specific factors. Respondents pushed back on a formulaic approach, saying these have failed in the past, don’t work across different industries, and ignore scheme specifics.

There were requests for TPR to clarify how covenant should be assessed; for example, stress testing and the calculation of covenant with reference to a covenant-agnostic deficit. There was also support for a greater number of illustrative examples.

Other TPR proposals were less welcome, including:

  • illustrative metrics for covenant assessments
  • limiting scheme reliance on indirect covenant
  • the concept of covenant visibility — although some incorrectly thought we proposed to remove all reliance on the covenant after three to five years

There were some requests for formulaic or more explicit guidance on covenant assessment for small schemes and for a process to agree on the assessment outcome with TPR early in the valuation period.

Question 5. Reliance on indirect covenant

We asked:

Do you think that the strength of the wider commercial group should be factored into the sponsoring employer’s assessment? If so, how, and to what degree?

You said:

There was resounding support for indirect support – for example, the wider group — to be factored into the employer covenant assessment. However, there were mixed views on when this would be appropriate. Some felt it should only be included in the covenant assessment when there is explicit legal recourse, or at least a clear and tangible benefit to the scheme. Others felt this would depend on the scheme’s situation. There was concern that limiting reliance on indirect support could result in it being withdrawn or connections severed, leaving the scheme in a weaker position.

Respondents asked for TPR to provide guidance on:   

  • when greater reliance can be placed on indirect support
  • the downside risk indirect support can also place on the covenant
  • ‘unusual’ covenant types that might allow for greater reliance on indirect support

Question 6. Covenant grades

We asked:
  1. Should we use a greater range of covenant grades to set guidelines in the code and assess schemes and, if so, what would be an appropriate number of grades?
  2. Would there be sufficiently different characteristics between a greater number of grades, such that a set of trustees could reasonably and reliably assess covenant strength without requiring professional advice?
You said:

Around half of the respondents commented on the number of grades required to demonstrate covenant strength. If covenant is retained, the majority thought the existing four grades were appropriate. Increasing this range would not improve clarity but could require schemes to take additional professional advice.

Chapter 5: General principles

Question 7. Low dependency long-term objective

We asked:

Should all DB schemes have a low level of dependency on the employer by the time they are significantly mature?

If not, what do you think would be an appropriate expectation to ensure trustees manage the runoff phase for their scheme effectively and efficiently?

You said:

The majority of respondents supported the low dependency principle, although many only felt this was appropriate for closed schemes in Fast Track.

A small minority were clearly opposed to the principle. For some, it was unclear whether they supported the principle or not.

Many respondents raised that there will be some schemes that can take a different approach in Bespoke, including the following examples:

  • schemes which have reached significant maturity and have a strong covenant should be able to allow for it in their funding strategies
  • open schemes should be treated differently and have a different long-term objective
  • charities should be treated differently.

Question 8. Timing of the long-term objectives

We asked:

What factors should influence the timing of reaching the LTO? Do you think that the timing should be linked to maturity?

You said:

The majority of respondents were in favour of maturity being used to set the timing of reaching the long-term objective (LTO) in Fast Track. However, many of those said there should be more flexibility to set the timing in Bespoke based on other factors, such as covenant visibility, funding level and risk appetite. A minority suggested that covenant visibility should play a role in the timing of reaching the LTO for Fast Track, either considered alongside maturity or as the only driver. (A number of respondents did not directly answer the questions.)

Many respondents raised concerns about schemes not being able to allow for covenant strength when they have reached significant maturity whether through Bespoke or Fast Track. Some respondents suggested that the concept of significant maturity was not applicable to schemes open to new members.

Question 9. High resilience to risk at the long-term objective

We asked:

Do you think that the investment portfolio should be highly resilient to risk when schemes reach their long-term objective ? If not, what do you suggest?

You said:

Respondents were strongly in favour of investment portfolios being highly resilient to risk when schemes reach their long-term objective. While some felt it was important for ‘high resilience to risk’ to be well-defined, others expressed concern over tight prescription.

Some suggested that schemes could take more risk if there were contingent assets or other guarantees were in place, while others felt good covenant visibility could support higher risk, which could help a scheme get to buy-out, for example.

Question 10. Risk-taking for immature schemes

We asked:

Is it reasonable for less mature schemes, which would have more time to reach low dependency funding, to assume and take relatively more investment risk than a mature scheme?

You said:

Respondents were overwhelmingly in favour of less mature schemes being able to assume and take more investment risk than mature schemes, as there is longer to recover any shortfall, and it could reduce the cost for employers.

Many made the point that the covenant still had to be able to support these higher levels of risk and that schemes a long way from maturity would rely on the covenant for longer.

Some still favoured hedging, especially of unrewarded risks, though many made the point that it is more difficult to match longer-dated liabilities. A few suggested that positive cashflows could support greater levels of risk.

Question 11. Journey planning

We asked:

What are your views of the rationale above for the journey plan? Do you think there is there a better way for trustees to evidence that their TPs have been set consistently with the long-term objective?

You said:

There was overwhelming support for the concept of a journey plan to deliver the scheme’s LTO, with many saying it was common practice already. Respondents generally viewed this as a matter of good governance and commented on its usefulness as a scheme management tool for:

  • planning purposes
  • identifying and managing scheme risks
  • monitoring the scheme’s development on an ongoing basis and taking corrective action to stay on plan
  • engagement with the employer.

A number of respondents raised concerns about allowing sufficient flexibility in the journey plans of schemes choosing the Bespoke route. Some responses also indicated the need for us to be clearer about whether consistency between technical provisions and the long-term objective meant that TPs had to converge to the long-term objective.

Question 12. Relevance of investments for funding

We asked:

Do you agree that the actual investments and investment strategy are a relevant factor for scheme funding?

You said:

Respondents overwhelmingly agreed that the actual investments and investment strategy are relevant factors in scheme funding. Many recognised a need for covenant and/or contingent assets to support downside investment risk.

Some respondents disagreed, using economic justifications to argue for higher, rather than lower, funding levels where more risk is taken. Others argued that, given the status quo, it would be difficult to move away from this link.

Many wish to retain the possibility of having a more prudent level of TPs than those that the investment strategy could justify.

Question 13. Broad consistency between investment and funding strategy

We asked:
  1. Should the investment strategy be broadly consistent with the level of current and future investment risk assumed in the funding strategy? If not, why not?
  2. If it is not broadly consistent, for instance where trustees want to take additional investment risk (than that assumed in the TPs), should trustees have to demonstrate that the investment risk taken can be managed appropriately? If not, why not and what would you suggest?

You said:

The vast majority of respondents agreed that the investment strategy should be broadly consistent with the level of current and future investment risk. Some were concerned with the phrasing of the question, noting that investment risk does not take account of discount rates but rather that discount rates take account of investment risk.

There were fewer answers to part B, perhaps mainly due to the level of support for A. Those who answered strongly agreed that there should be a strong covenant to support extra investment risk. Many were keen to maintain the flexibility of the investment strategy.

Question 14. Liquidity and quality at maturity

We asked:

Do you think that security, quality, and liquidity become more important as a scheme becomes significantly mature? In particular, do you think that the scheme’s asset allocation at significant maturity should have a high level of liquidity and a high average credit quality?

You said:

There was a mixed reaction to this question. The majority of respondents focused on the liquidity element.

Many respondents agreed that liquidity becomes more important as schemes mature, but some challenged this. Several did not think a high level of liquidity at significant maturity is necessarily appropriate where schemes are not aiming for buy-out. Moreover, some schemes suggested that a diversified portfolio of illiquid investments with predictable contractual cashflows can meet a large part of the liquidity needs of a portfolio.

Some respondents noted that liability cashflows are more certain closer to significant maturity, enabling more illiquid matching investments to be used. In addition, some respondents said hedging might increase as a scheme matures, increasing the need for liquidity to meet collateral and margin calls. Finally, transfers out were highlighted as an area that, by their nature, led to less predictable cashflows.

Question 15. Covenant visibility

We asked:
  1. Do you think it is prudent for reliance on employer covenant to be reduced beyond the period over which there is reasonable visibility? If not, why not?
  2. How much visibility do you think most trustees can have over the employer covenant? In the absence of evidence to the contrary, do you think it is reasonable for most schemes to assume there is reduced visibility beyond 3 to 5 years?
You said:

Most respondents agreed that trustees should consider the risk of a longer-term decline in covenant when deciding what reliance to place on it. However, there were a range of views on where and how this should factor into trustee thinking.

Some felt it was sensible to reduce reliance on the covenant in the TPs, while others felt that longer-term risks were already factored into the assessment. Some interpreted the approach as overly prudent and inconsistent with the typically longer terms used for business loans. Others cautioned that reducing reliance on the covenant may result in a higher drain on employer cash flows in the near term.

Those that supported TPR’s approach to covenant visibility still felt longer-term covenant reliance should be allowed through Bespoke. We noted that some of the responses were based on a misunderstanding of the proposals, that TPR proposed to remove all reliance on the covenant after 3 to 5 years. This was not our intention.

Question 16. Use of additional support

We asked:

Should additional support, such as contingent assets and guarantees, be allowed in scheme’s funding arrangements provided they are sufficient for the risk being supported, appropriately valued, legally enforceable and realisable at their necessary valued when required?

You said:

Respondents overwhelmingly supported ‘additional support’ being allowed in scheme funding arrangements. Most accepted this would need to be done via Bespoke valuations - very few wanted this to be included in Fast Track.

Additional support structures are seen as a helpful mechanism to avoid the risk of trapped surplus, especially where recovery plans are shorter – but many respondents wanted clarity on how TPR would assess these arrangements consistently.

There was some concern that setting the benchmark too high could dissuade employers from providing additional support and that TPR’s requirements could be disproportionately expensive (particularly for small schemes). Some asked for TPR and PPF objectives to be aligned. Others noted that even if only partial additional support is provided, this still helps trustees have a 'seat at the table' in broader discussions with management.

Some respondents queried whether TPR could set a lower initial standard on acceptable structures and subsequently raise the bar. Others felt that contingent support should be permissible for weaker schemes whose employers’ affordability is constrained – not stronger schemes that want to avoid a short recovery plan.

Question 17. Appropriateness of recovery plans and affordability as key factors

We asked:
  1. Should employer affordability be the key factor to determine the appropriateness of a recovery plan? If not, what should it be?
  2. Is it reasonable to require schemes with a stronger employer covenant (and a resulting reduction in prudence in the assumed TPs and size of deficits) to have a commensurately shorter recovery plan?
You said:

Respondents agreed that affordability was a key factor in determining the appropriateness of a recovery plan and that it should be considered alongside the employer’s investment in sustainable growth as well as equitable treatment of other stakeholders.

There were mixed views on recovery plan lengths. Some agreed that strong employers should be able to run off their deficits with short recovery plans. Others (mainly employer organisations) argued that this would unfairly penalise strong employers who, they said, did not have the same imperative to reduce deficits so quickly because of their longer covenant visibility.

Question 18. Open schemes, past service

We asked:

Should past service have the same level of security, irrespective of whether the scheme is open or closed?

You said:

Respondents were almost equally split on whether past service should have the same level of security in both open and closed schemes.

There was general agreement that past service in schemes that are closed to new entrants should have the same level of security as schemes that are closed to future accrual.

However, there were concerns over providing the same level of security to past service in schemes that are open to new members, as some did not think this principle reflected the different investment profiles of open schemes – their cash flow positive nature, ability to invest in illiquid assets, and longer timeframe available for their investments.

Respondents cautioned that, as a result, open schemes might de-risk their investment strategy unnecessarily or be forced to close.

Question 19. Open schemes, future accruals

We asked:

Do you think it would be good practice for trustees to ensure that the provision of future accruals does not compromise the security of accrued benefits?

You said:

The majority of respondents agreed that the provision of future accrual should not compromise the security of accrued benefits. Those who disagreed were primarily concerned about the impact on schemes open to new entrants, more specifically, that it could lead to the unnecessary closure of open schemes. Many respondents who agreed said that overly restrictive Fast Track parameters could risk the closure of open schemes.

Several respondents noted that trustees might have limited influence over future service as it’s an employment issue, and others commented that you could allow cross-subsidies between past and future service.

Chapter 6: Other issues

Question 20. Other issues

We asked:

Do you agree with our assessment of the issues above and do you have any further comments?

You said:

The majority of respondents agreed with our approach to the principles of the framework but were waiting for further details of how the regime would work in practice. Many also highlighted the particular areas they would like to see discussed in the second consultation, including an assessment of impacts. The majority of respondents used this question to highlight their main area of concern – for example, a loss of flexibility in Bespoke and the need to recognise open scheme characteristics.

Key themes included:

  • TPR going beyond the scope of the 2018 White Paper
  • striking the right balance between member security and employer cost
  • increasing sponsoring employer costs may create intergenerational fairness issues or lead to scheme closures
  • the need to provide more guidance to avoid trapped surplus
  • trustee autonomy
  • more clarity on our approach to schemes with unusual employers
  • unintended consequences – a non-attractive pension offering may cause issues with retention and recruitment,
  • open schemes overfunding and call-out of PSA debates
  • market distortion if we over prescribe investment strategies
  • climate change

Chapter 8: Setting the long-term objective

Question 21. Fast track low dependency discount rate

We asked:

What are your views on our proposal that the appropriate low dependency funding basis for Fast Track should be with a discount rate somewhere in the range of Gilts +0.5% to Gilts +0.25%? Where in the range do you think it should be and why? If you disagree, what do you think would be a more appropriate basis and why (please provide evidence)?

You said:

A clear majority of those who expressed a preference agreed with the proposed range for the discount rate. Of this majority, more respondents preferred a discount rate towards the top of the range (gilts + 0.5%), than the bottom (gilts + 0.25%).

The most common alternative approach proposed by respondents was to set the discount rates based on credit spreads or a prudent expected return on an appropriate investment strategy. Some agreed with the proposed range in current market conditions but suggested the margin above gilts be regularly reviewed and altered if conditions change. Several respondents thought that buy-out pricing should influence the choice of the discount rate.

Question 22. Options for defining other assumptions for Fast Track low dependency funding basis

We asked: Which of these options should be used to set assumptions for low dependency funding under Fast Track? Are there any other options we should consider? Are there any other pros and cons we should consider?

You said:

Almost all respondents chose either: 

  • option 1 — that all other assumptions should be overall best estimate
  • option 2 — that TPR should define assumptions which are not scheme-specific.

Many stated they were against option 3, that TPR define all assumptions.

Of those who did not choose option 1, many expressed concern that the overall valuation basis might not have sufficient prudence. However, some of those who favoured option 1 commented that the use of best estimate assumptions would be helpful in projecting realistic cash flow estimates.

Of those that chose option 2, there was not a consensus on what should be defined, but many noted inflation should be one such assumption. Several respondents suggested that we issue guidelines rather than define specific assumptions.

Question 23. Defining assumptions for Fast Track low dependency funding basis

We asked:
  1. What are the most significant assumptions (other than discount rates) for the calculation of the Fast Track low dependency liabilities?
  2. If we were to specify some or all of the assumptions to calculate the level of Fast Track low dependency liabilities, which assumptions should we specify and how should we do this? Do you have views on the suggested benchmarking factors in the table above?
  3. If we determined mortality assumptions, how could we balance the scheme-specific nature of mortality with the desire to ensure a level of consistency in the assumptions used by different schemes?
You said:

Almost all respondents cited inflation and mortality as the most significant assumptions (other than discount rate) in the calculation of the Fast Track low dependency liabilities.

When referring to inflation, some respondents made clear that they were referring to inflation and inflation-related assumptions such as pension increases. Several respondents also mentioned expenses and cash commutation as other important assumptions.

Respondents presented mixed answers to which assumptions should be specified and how we should do this. A majority agreed that inflation could be specified, but several specifically disagreed with this position.

Of those who expressed a preference, the majority felt that the choice of mortality assumption should be scheme-specific rather than prescribed. However, some suggested that we could give guidelines, minimums or guidance on the methodology.

Question 24. Low dependency basis — verification that other assumptions meet the best estimate principle

We asked:
  1. Which of these options do you prefer to verify that other assumptions used for low dependency liabilities under Fast Track meet the ‘best estimate’ principle and why? Are there any other pros and cons we should consider? Are there any other options we should consider?
  2. If we decided to require schemes to provide additional information about their assumptions, what information should we require schemes to provide compared to the current requirements?
You said:

Respondents were relatively evenly split between:

  • option 2 - that additional disclosure requirements would be needed to verify that other assumptions were best estimate
  • option 4 - that this verification could be achieved by a Scheme Actuary certificate.

A small number of respondents thought that no additional requirement for verification was needed.

Of those who did not favour option 2, many were worried that providing additional verification could be burdensome for schemes. However, those who did not favour option 4 were concerned that such a requirement could alter the balance of power within schemes.

There were relatively few responses to what information should be supplied under option 2, although some respondents suggested there should be enough information in the Statement of Funding Principles, and others suggested any mortality analysis be disclosed.

Question 25. Other assumptions for Fast Track low dependency basis — prudence

We asked:

  1. If we specified certain assumptions, should we aim for those to be best estimate or to be chosen prudently?
  2. Given the uncertainty around assumptions such as future improvements in mortality should we a) define these assumptions in Fast Track and b) set the assumptions prudently
You said:

A clear majority thought the other assumptions should be set at best estimate, although several respondents made clear that mortality should be considered separately. Those choosing best estimate said:

  • best estimate assumptions produced more useful cashflow projections
  • introducing prudence in too many assumptions could make it difficult to judge the overall level of prudence
  • prudence would be difficult to set universally as it is scheme-specific

Those opting for prudence felt that it was necessary to achieve low dependency, and without it the ‘bar’ would be set too low.

Many respondents did not answer question B. Of those that did, the majority thought we should define the future mortality improvement assumption, but a majority of those did not want it set prudently. Some suggested we did not define an assumption but specified a minimum.

Question 26. Low dependency liabilities – reserve for future ongoing expenses

We asked:
  1. Should the low dependency liabilities carry an expenses reserve? If so, should this only be a requirement for schemes that self-fund their expenses?
  2. To what extent should we define the reserve for future expenses under Fast Track? Should we just provide guidance on how to calculate an appropriate reserve? As part of that, what level of ongoing expenses is it reasonable to allow the employer to pay directly without any reserve?
  3. If we defined guidelines on expenses for Fast Track, how should we reflect the proportionally different level of expenses incurred by schemes of different sizes? Could we adopt a sliding scale of percentages of liabilities based on the size of the scheme or a fixed element and proportionate element of expenses?
You said:

The majority of respondents agreed that the low dependency liabilities should carry an expenses reserve. However, a significant proportion thought a reserve should not be required where the employer pays the expenses due to concerns it would lead to overfunding. Those who thought that the reserve should apply to all schemes cited consistency as the reason. Many respondents were concerned that a reserve might be particularly burdensome for small schemes.

A smaller number of respondents answered part B and fewer still answered C. Of those that answered B — to what extent should the reserve be defined - many were happy that a sliding scale would be used in the definition of expenses. Several respondents thought both a sliding scale and a fixed element should be used.

The majority of respondents who answered question C — which considered the approach to be taken for schemes of different sizes — thought that TPR should not define the level of expense reserve noting that those involved in the scheme would be better able to set an appropriate level.

Question 27. Definitions of maturity

We asked:
  1. Should maturity be defined as duration for the purpose of prescribing significant maturity under Fast Track? If not, which measure would you favour and why? Note that whatever measure we use, it needs to be applicable not only to the time at which we would expect a scheme to reach significant maturity but also at all earlier times in the scheme’s life.
  2. Whichever method is used to determine maturity, we need to use actuarial assumptions to make the calculation. Should we require that the Fast Track low dependency assumptions are used for this purpose? What other assumptions could be used?
You said:

An overwhelming majority of respondents who indicated a clear preference were in favour of using duration to determine maturity and using low dependency assumptions to calculate duration for consistency. A small number of respondents suggested using one of the other possible measures included in our consultation.

Some respondents raised issues about: 

  • the treatment of buy-ins in the calculation of duration 
  • duration being a difficult concept to understand

Question 28. Defining the timing point for significant maturity

We asked:

What are your views on our proposal to set significant maturity (used to define the timeframe for reaching the long-term objective) for Fast Track to be in the range of a scheme duration of 14 to 12 years (or equivalent on a different maturity measure)? If you disagree, what would be a more appropriate timeframe and why? Please provide evidence.

You said:

Of those that expressed a clear preference, the overwhelming majority were in favour of our proposed timing for significant maturity. Respondents did not give a clear steer on whether the point should be flexible or fixed. A few respondents thought a lower duration for significant maturity, meaning a later point in time, could be used.

A significant minority of respondents did not provide a clear preference, because either they felt it was outside of their expertise or they disagreed with basing the timeframe for reaching the long-term objective on maturity.

Some respondents raised issues about:

  • transitional issues for schemes already close to significant maturity — based on the proposed measure
  • allowing for covenant strength and visibility at the point of significant maturity

Question 29. Points or ranges for low dependency funding basis and timing point

We asked:

Do you think our proposal to set a particular level for the low dependency funding basis and/or a range for the significant maturity timing associated with the long-term objective would be helpful to schemes to manage volatility and allow some smoothing? If not, what would you suggest?

You said:

The majority of respondents said significant maturity should be defined as a range, and that the low-dependency funding basis should be set at a particular level.

Those who disagreed with setting a range for significant maturity timing mostly preferred the clarity of providing a single point. Many respondents wanted more flexibility for schemes nearer significant maturity.

Only a small number disagreed with the proposal to set a single point for the low-dependency funding basis, although some felt a range of outcomes would be better here too.

Some respondents also commented that the bespoke route should offer more flexibility in respect of both the funding basis and maturity timing.

Chapter 9: Technical provisions

Question 30. Journey plan shape for Fast Track TPs

We asked:
  1. Which shape of journey plan is most appropriate to define for calculating the Fast Track TPs and why? Does this vary depending on the circumstances of the scheme?
  2. Are there any other journey plan shapes we should consider?
  3. What unintended consequences might arise from adopting the linear de-risking or horizon method journey plans for Fast Track?
You said:

There was no strong consensus on the shape of the journey plan. Many respondents thought that this should be left to the trustees in order to avoid unwinding existing plans which fit scheme circumstances well and remained suitable. Others cited avoidance of systemic risk and minimising compliance costs as good reasons for giving trustees this flexibility. Some respondents were under the misapprehension that they would be required to follow the same journey plan shape as that adopted by TPR for setting the Fast Track parameters.

Among those respondents who specifically commented on journey plan shapes, the vast majority preferred the linear de-risking or stepped approaches, with many being indifferent between the two. Each of the journey plan shapes was considered to have its merits, the linear de-risking plan preferred for its simplicity and the stepped de-risking plan for its practicality, although both were acknowledged to require further guidance to make them work with the dual discount rate approaches currently used by many. Only a very small number of respondents preferred the horizon method. Other suggestions for journey plan shapes included stepped approaches based on de-risking triggers linked to funding strength or covenant visibility.

Question 31. Key factors for Fast Track TPs

We asked:

Should other scheme-specific factors other than covenant and maturity be considered to define the journey plan and TPs in Fast Track?

You said:

The majority of respondents agreed with our proposal that covenant and maturity were the main factors to be considered. Some respondents were concerned about how we would treat schemes which remain open to new members, noting that such schemes might mature more slowly or not at all. Investment strategy was highlighted as a defining factor for the journey plan by some, and therefore consistency between investment strategy and funding strategy was considered important.   

Other factors suggested for further consideration were:

  • the funding strength which often determines how much risk is taken and over what period
  • the ability of large schemes to access higher yielding investments and thus support higher discount rates
  • a greater focus on longevity risk which can be the cause of significant cashflow uncertainty during periods of low interest rates and low inflation

Question 32. Extent of reliance on covenant in Fast Track TPs

We asked:
  1. Should we define a maximum period of acceptable full covenant reliance for Fast Track TPs? For example, a general guideline of five years? Or should covenant reliance be assumed to decline in the much shorter term (or immediately)?
  2. What level of covenant support should subsequently be assumed? Should there be an assumption of a single covenant grade reduction (eg CG1 to CG2), a reduction to assumed returns in line with a weak covenant, or something else?
  3. Over what period should any reduction in reliance take place? Should this be immediate (eg a reduction to a lower covenant reliance in the sixth year) or more gradual (for example, over the subsequent five years)?
  4. Does the need for a covenant visibility overlay depend on the approach taken for the journey plan to low dependency? For example, is this a more relevant consideration where the horizon journey plan shape is used?
You said:

Responses to this question were mixed. On balance, respondents did not want us to specify the period over which full covenant reliance should be assumed. Among those who thought we should define a maximum period, five years appeared to be the favoured option, although some felt that we should not factor covenant into Fast Track at all.

Reasons for the varied views included:

  • the need for specific analysis to decide on any reduction
  • the complexity of doing this in Fast Track
  • double counting where covenant assessments already take account of limited covenant visibility
  • risk of gaming
  • putting an unnecessary cash drain on employers

Were a maximum period to be specified, then responses to how this should be done were equally mixed between those who thought there should be no reduction to others who supported a reduction. The majority in the latter group supported a gradual decline, but there were mixed views on how to quantify the reduction.

Few commented on the relevance of journey plans and those who did noted that journey plans that incorporated linear or stepped de-risking already reflect an assumed level of lower covenant reliance, thus making a further overlay for covenant visibility unnecessary.

Question 33. How Fast Track TPs should be expressed

We asked:

Which option do you think is preferable for defining TPs/journey plans under Fast Track and why? What are the practical issues associated with each option? If you disagree with these options, what would you suggest and why

You said:

Among those who responded, the consensus was for Fast Track TPs to be specified as a percentage of the long-term objective This approach was considered to be more stable over time and easier for trustees to understand. It also kept sight of the ultimate target and lessened the need for a detailed specification of all assumptions. The yield curve approach was considered the most appropriate theoretically, but its complexity and practical limitations were acknowledged by many. Very few favoured an approach involving a single discount rate.

Whatever the approach adopted, respondents cautioned against making it too easy for schemes to simply comply with the Fast Track minimum and take their eye off risk management; suggestions to avoid this included supplementary requirements for stress testing or scenario testing, and for the degree of covenant support available to meet reasonable downside.

Question 34. Method to derive Fast Track TPs

We asked:
  1. Do you prefer a particular approach? If so, why? Is there another approach that would be suitable?
  2. Do you have ideas as how to best approach each option?
  3. How do trustees incorporate considerations about covenant strength into their TP assumptions/discount rates?
  4. If a stochastic approach is adopted, what would you consider to be an appropriate confidence level against which to mark the results?
  5. Do you have any data or modelling results which you think would provide useful evidence for the baseline TPs or covenant overlay? Please provide full details of methodology/data limitations.
You said:

Respondents considered the end result — the parameters for Fast Track — to be more important than the technical methods used to derive them. But they also expressed an expectation for a governance process involving external input and challenge.

Each of the methods we asked about was considered to have its merits. The deterministic method was most favoured because of its simplicity and transparency, but in practice, many respondents recognised that we would need to use other methods as well to hone the output to achieve the desired objective and to sense check.

On how to incorporate covenant strength in the technical provisions, many responses referred to an adjustment for covenant in the discount rate or adjustments requiring scheme-specific advice and/or negotiations with the employer. Other suggestions included linking covenant grades to suitable corporate bond indices; or scheme-specific approaches which ensure all risks are identified, measured and monitored; and that the employer can demonstrate the ability to underwrite them.

Chapter 10: Investments

Q35 Which reference point from which to measure investment risk in Fast Track

We asked:
  1. Would a measure of the liabilities be an appropriate position to measure investment risk from? If not, why not?
  2. Do you prefer a liability measure on the low dependency basis (gilts +0.5% to +0.25%) or a gilts flat basis? Why? Are there any other liability measures that would be suitable?
  3. Would a liability reference portfolio approach (as a proxy for liabilities) for smaller schemes be more proportionate and practical? If so, how should a small scheme be defined for this purpose (number of members, assets or liabilities)? What would be an appropriate threshold?
  4. Would a reference portfolio consisting of gilts and inflation-linked gilts with a duration similar to the liabilities be appropriate as a proxy for the liabilities for smaller schemes? If not, how would you go about constructing a reference portfolio as a reference point from which to measure risk for smaller schemes?
You said:

A. Almost all respondents agreed that it would be appropriate to measure investment risk relative to liabilities. 

B. The low dependency basis was generally preferred as a liability measure. Some preferred a gilts flat basis, particularly for schemes targeting buy-out, and a few favoured a less prudent basis.

C. and D. Almost all respondents favoured a liability reference portfolio approach for smaller schemes, with quite a few thinking that this would be suitable for all schemes. Using number of members as the cut-off (for example, 100 members) was slightly preferred to using asset or liability values. While a reference portfolio of suitable gilts and inflation-linked gilts was generally preferred, some respondents believed that credit assets should be included in the mix.

Q36 methodology to measure investment risk in Fast Track?

We asked:
  1. Would a simple stress test to measure investment risk in Fast Track be the most preferable option? If not, why not? Are there other measures of investment risk that are more suitable, taking account of the desire for a relatively simple and objective measure?
  2. Do you agree with the proposed principles for an appropriate pensions stress test, namely a fall in growth assets and a fall in interest rates? If not, what do you suggest?
  3. What are your views on which stress test we should use? Do you think the PPF stress test (Bespoke and simple approach) would be a good starting point?
  4. Which of the ways to measure the impact of the stress would you prefer and why? Is there an alternative method not listed that would work better? If so, please describe it.
You said:

A. There was broad agreement that a simple stress test would be the preferred option to measure investment risk in Fast Track. While some concerns were raised that it is too simplistic and only measures short-term risk, overall, it was seen as a pragmatic approach which avoids model risk.

B. Most people thought that a fall in growth assets and in interest rates was a suitable way of capturing the majority of the investment risk, although many issues were raised about over-simplicity, including that is:

  • doesn’t allow for diversification
  • doesn’t capture impact on covenant of stresses, so not ideal in terms of IRM.
  • doesn’t capture credit stress adequately
  • has the potential to incentivise certain asset classes and sub-asset classes
  • doesn’t capture stagflation, which could impact covenant strength

C. The vast majority of respondents thought that the PPF stress test was a good starting point, due to its consistency, simplicity and ease of communication. It was recognised that the PPF stresses are designed to measure risk relative to PPF benefits, not the long term objective, so may not be perfect for TPR’s purposes.

D. In nearly all cases, respondents preferred option 1 to measure the impact of the stress test - . change in long-term objective funding level versus initial long-term objective value.

Q37 Approach to defining maximum levels of investment risk for schemes of different maturities in Fast Track

We asked:
  1. What are your views on the proposed methodology for setting maximum thresholds for investment risk for significantly mature schemes in Fast Track? If you disagree, what would you suggest?
  2. In relation to acceptable portfolios and consistency with discount rates, is it reasonable to use a best estimate return premium for growth assets over long-term gilts in the range of 3-5% pa?
  3. Should the allowance for prudence be higher for an investment portfolio with a higher level of risk? d. What are your views on the considerations we have set out to determine investment limits for immature schemes (journey plan shape, downside risk and covenant)? In particular, should the maximum level of investment risk for immature schemes vary by covenant under Fast Track?
You said:

A. There was general agreement to a maximum Fast Track allocation of 20% in growth assets at significant maturity. However, there was some concern that this is too simplistic, that it ignores the role of cashflow-matched portfolios and that it could incentivise high-risk within growth portfolios, including leveraged positions. A tolerable downside investment stress was suggested as an alternative to allow greater flexibility in investment strategies and to avoid forcing investments into a combination of very low-risk and very high-risk investments only. There was, however, recognition of the importance of simplicity.

B. 3-5% premium over gilts for the return on growth assets was considered sensible by most under survey period market conditions, but it was noted that these should be monitored.

C. There was broad agreement that the allowance for prudence should be greater where there is a higher risk in a portfolio.

D. Most respondents thought that the maximum level of investment risk for immature schemes should vary by covenant under Fast Track, but significant concern was expressed about the cost to some schemes of obtaining suitable covenant advice.

Q38 Defining guidelines for liquidity and quality of the investment portfolio in Fast Track

We asked:
  1. Do you think we should define some guidelines around liquidity and quality in Fast Track?
  2. If so, what are your views on the options outlined above? Are there other approaches you favour?
  3. What limits would you set on the above criteria and why?
  4. How would the above change for a more immature plan?
You said:

A. There were mixed responses as to whether we should define guidelines on liquidity and quality in Fast Track. The majority were in favour of some liquidity guidelines, partly to meet derivative collateral calls and also bearing in mind the possibility of large transfers. But many felt that liquidity is already a well-managed risk and the extra complication of setting rules was unnecessary.

B. Option 1 (principles-based approach) was the most popular. The majority of respondents did not wish to see quantification of illiquid asset maxima regardless of funds’ needs. Many were keen to ensure that any rules established did not stop cashflow-matching approaches. Options 4 and 6 were also popular among those who expressed a preference.

C. Most respondents who were in favour of limits were keen for the limits to be lenient, as it was felt that liquidity would not be a problem for most funds which target G+1% as their long-term objective, so rules need only prevent unusual or extreme behaviours.

D. Some thought that the limits should not apply or be less onerous for less mature schemes. Some suggested an approach based on levels 1,2 and 3.

Chapter 11: Recovery plan

Question 39. Fast Track guidelines on recovery plan length

We asked:
  1. What are your views on the principles set out above in relation to recovery plan length under Fast Track? In particular, do you have views on what may be appropriate recovery plan length thresholds for different covenant strengths? Is it helpful to frame these in terms of the typical multiple of valuation cycles (ie three years)?
  2. Do you consider it would be more appropriate to have a single maximum guidance recovery plan length and to expect trustees (under the Bespoke framework) to justify any plans that are longer than this?
  3. Do you think Fast Track recovery plan lengths should be shorter for schemes nearing and/or at significant maturity? If so, to what extent?
You said:

A small minority were against any approach involving maximum recovery plan lengths on the grounds that it couldn’t incorporate the multitude of factors that need to be taken into account. However, most respondents considered that a ‘maximum’ recovery plan length should be specified for Fast Track, although they viewed this as different to setting an ‘appropriate’ recovery plan length.

Many seemed to have no preference between the simplicity of a fixed maximum period for all schemes (which would also reduce the potential for gaming), and the added complexity of one that varied with covenant strength. On balance, more were in favour of the latter approach if there would be consistency between other aspects of the Fast Track.

Most accepted that the recovery plan length should reduce as the scheme approached significant maturity.

Some respondents alluded to the exact parameter(s) having to be decided on practical grounds after testing against other objectives. There was a clear preference (among the few who offered an opinion for linking the specified period(s) to valuation cycles for pragmatic reasons.

Question 40. Fast track guidelines on recovery plan structure

We asked:

Should the extent of back-end loading be limited to increases which are in line with inflation (in the absence of appropriate additional support such as a contingent asset being provided)? Or should there be more flexibility subject to a significant proportion of DRCs being committed in the early years of the plan? If inflation-linked increases are acceptable, what measure of inflation do you consider would be an appropriate benchmark?

You said:

There was a general acceptance that back-end loaded recovery plans should be controlled because they exposed the pension scheme to additional sponsor risk at a time when covenant visibility may not be so clear. More respondents were in favour of inflation-linked deficit contributions than contributions linked to other forms of increases, which would be difficult to define and administer and thus be subject to gaming. There was no strong preference for any specific measure of inflation, but the uncertainty around the future of the RPI was noted.

Question 41. Fast track guidelines on investment outperformance

We asked:

Should investment outperformance not be allowed in Fast Track recovery plans? What do you think the impacts may be?

You said:

Although this question referred to Fast Track only, many chose to answer it more widely. Opinions on whether investment outperformance should be allowed for in the Fast Track recovery plans were largely balanced – marginally more respondents did not think it should be allowed, and quite a few were silent or unclear. Those who did not think investment outperformance should be allowed in Fast Track recovery plans cited the main advantages of simplicity, clarity and removal of ambiguity.

Those against argued that: 

  • investment outperformance is already a feature of recovery plans 
  • it's widely practised 
  • dis-allowing it in Fast Track would simply incentivise the affected schemes to choose the Bespoke route

Some went further to raise concerns over bespoke approaches not being allowed to take credit for investment outperformance without explicit support (such as contingent security).  

Many respondents alluded to the need for some flexibility in the Fast Track for a limited period to cope with situations when markets were considered abnormal at the date of valuation, such as financial crises or pandemics.

Question 42. Fast track guidelines on future recovery plans.

We asked:

In what circumstances should/could outstanding recovery plan payments be re-spread at subsequent valuations? In particular: a. If a scheme’s funding deficit has reduced (at least) in line with the expectations at the previous valuation, would it be appropriate to maintain the same end date? Or would it be pragmatic to respread the remaining deficit over a renewed period? 174 b. If a scheme’s funding deficit is higher than expected, what guidelines should apply for the appropriate length of the new recovery plan? c. Would the idea of ‘re-spreading’ be more acceptable where a scheme has a long period before it becomes significantly mature.

You said:

Responses were evenly split on whether re-spreading should be allowed at all in Fast Track, with a significant minority not expressing any opinion. Some of the reasons cited against re-spreading in Fast Track were to:

  • avoid unnecessary complexity,
  • avoid levelling down by extending recovery plan lengths without good reason,
  • avoid the risk of future recovery plans becoming unsupportable
  • lock in funding gains as schemes mature in order to reach a low level of dependency on the employer once significantly mature.

Reasons for allowing re-spreading in Fast Track were that the employer remained strong, or that covenant visibility had been extended or was no longer able to afford the same or a higher level of contributions. Some questioned whether re-spreading should be an issue as long as the scheme continued the meet the Fast Track requirements at each valuation.

For immature schemes, marginally more were in favour of allowing re-spreading, citing increased volatility as a key reason and the longer time span and/or covenant strength as mitigants. Where the deficit has reduced since the last valuation, among those who responded, the preference was marginally in favour of retaining the same end-date. Other ideas included a fixed period for re-spreading subject to DRCs being no lower than under the previous recovery plan.

Question 43. Equitability

We asked:

What are your views on the concept of ‘equitability’ in respect of how a scheme is treated compared with other stakeholders?

Should any requirements be qualitative (in line with the commentary above) or should trustees also be expected to consider a specific metric?

If so, what might be an appropriate measure of equitability (for example, comparing the ratio of DRCs to dividends, or the size of scheme deficit to the ‘stake’ of other stakeholders) and how could this reflect a scheme’s superior creditor status over shareholders?

You said:

Almost all respondents agreed that the concept of equitability was a relevant consideration when setting recovery plans. However, almost all felt that this was too complex and varied an issue to be condensed into a simple ratio (which could undermine the trustees’ negotiating position). Many respondents considered that this should not be an issue where schemes have adopted recovery plans within our Fast Track guidelines. But there appeared to be a consensus around equitability being more of a concern for schemes with weaker employer covenants and longer recovery plans.

Overall, most respondents seemed to agree with us that this is a matter that is best dealt with in a nuanced way on a scheme-specific basis with further qualitative guidance from us.

Chapter 12: Open schemes

Question 44. Treating past service and future service liabilities separately in Fast Track

We asked:

What are your views on our proposed approach to outlining code guidelines for open schemes. Should any other approach to calculating future service liabilities be considered

You said:

Most respondents agreed that past service and future service liabilities should be treated separately. Those who did not agree were particularly concerned that the application of such a principle would force the closure of schemes that are open to new members. Some respondents commented that such an approach could lead to surpluses.

Question 45. Fast Track long-term objective for open schemes

We asked:

Should the long-term objective (low dependency at significant maturity) for an open scheme be the same for a closed scheme? If not, how should they differ?

You said: There was a mixed response to this question. Those who expressed a view were almost evenly split between those who agreed and those who disagreed that an open scheme should have the same long-term objective as a closed scheme. Many of those who disagreed caveated their answer to say they were referring to schemes that were open to new members. Some respondents were concerned that an unintended consequence would be the closure of these open schemes. Others stated that as a scheme open to new members may never reach significant maturity, there was no point in defining a long-term objective.

Question 46. Fast Track TPs for open schemes

We asked:

What option do you favour and why? Are there other options we should consider?

You said:

The majority of respondents who expressed a view said that TPs for schemes open to new members should be lower than TPs for closed schemes. Some suggested this would reflect the longer expected time to significant maturity for an open scheme, as compared to an equivalent closed scheme without any future accrual.

Question 47. Fast Track guidelines for calculating future service costs

We asked:
  1. Which options do you favour and why? Are there any other options for calculating future service costs which should be considered, for example pre-and post- retirement discount rates?
  2. If option C (best estimate) were adopted, how should the best estimate return assumption be determined? Are there any options other than those described above that we should consider?
  3. Would our preferred approach (option B) make it difficult for scheme actuaries to certify schedules of contributions?
You said:

The most popular options for calculating future service costs were option D — for TPR to give no guidelines and option B — to use the same assumptions as for the TPs but reflect the maturity of future service benefits.

Fewer respondents preferred option C — using best estimate assumptions in the calculations; and option A — using the same assumptions as for the TPs — although the preference was equally split between them.

Several commented that the answers were not fundamentally different, as the need to certify the schedule of contributions would create overriding requirements.

As so few preferred option C, there was limited feedback on how best estimate options should be determined. However, some respondents suggested that trustees take actuarial and/or professional advice.

The overwhelming majority felt that option B would not make it difficult to certify schedules of contributions, although few responded on the issue.

Question 48. Funding future service using past service surplus

We asked:

Do you think that this approach to funding future service using past service surplus is reasonable? If not, why not? What else would you suggest?

You said:

There was overwhelming support that past service surplus could be used to fund future service.

Chapter 13: Bespoke framework key features

Question 49. Criteria for assessing Bespoke arrangements

We asked:

What are your views on the criteria we propose to use to assess Bespoke arrangements? If you disagree, what would you change and why? What else should we consider?

You said:

There was general agreement with assessing Bespoke valuations in reference to criteria A (consider how the bespoke arrangement complies with legislation and any relevant DB code principles) and D (the quality of the supporting evidence provided by the trustees).

The majority of respondents did not agree with Bespoke arrangements being assessed using Fast Track as a reference point (criteria B). Concerns included:

  • limiting flexibility within the scheme-specific funding regime
  • positioning Fast Track as the ‘correct’ option when it might not be appropriate
  • hastening the closure of small schemes
  • causing unintended consequences on the wider economy and investments

There was general agreement that trustees should assess how risk is managed and provide appropriate mitigations or additional support. However, there were mixed views on whether it should be additional risk in reference to Fast Track that is assessed. The majority agreed that trustees should provide robust evidence in the statement of strategy, although said this could increase cost and trustee burden.

Question 50. Bespoke examples

We asked:
  1. Do you have any comments on the assessments we have made in the examples above?
  2. Could you provide other examples (relevant to your own scheme experience or that of schemes you advise) of arrangements which you think will follow the Bespoke route? Why do you think these arrangements would be compliant?
  3. In example 2 (long-term objective - cashflow driven investment (CDI) strategy), could it be appropriate, in your view, to be able to use a higher discount rate/lower value of TPs (low dependency basis) than in Fast Track? If so, in what circumstances and by how much?
You said:

Many used this question to highlight that they found it inappropriate to assess Bespoke submissions in reference to Fast Track. Some found the examples clear and helpful, but others said they were too simple. There were calls for more examples, including unusual or complex circumstances. Many asked for detailed guidance to be published with the final code, including how to assess contingent assets and guarantees. Some warned of an increase in regulatory burden and called for TPR to take a proportionate approach.

Further examples included, but were not limited to:

  • open schemes with long covenant visibility or additional covenant protections
  • using a contingent asset to address affordability constraints
  • where a higher discount rate may be justified if trustees use risk management solutions such as longevity swaps or pensioner buy-ins

The majority of those who responded to C said it would be appropriate for trustees with a CDI strategy to assume a higher discount rate / lower value of TPs than Fast Track, although trustees must demonstrate resilience and significant liquidity. Some suggested this should be allowed for in Fast Track.

Question 51. Stressed schemes

We asked:

  1. Assuming that affordability is genuinely constrained, are very long recovery plans ‘appropriate’ and therefore compliant with the Act?
  2. Alternatively, should we make an exception to the principles and allow the trustees of stressed schemes to take unsupported investment risk, or more investment risk than other CG4 schemes (schemes with weak employers)? What checks and balances should we put in place in addition to those mentioned above (equitable treatment, risk management)?
  3. For schemes with unviable recovery plans, should an exception be made for them in terms of the level of acceptable investment risk?
  4. Are you aware of situations other than stressed schemes where the trustees and employer would have difficulties meeting the Bespoke compliance principles?
You said:

The majority of respondents believed a very long recovery plan is an appropriate release valve for stressed schemes if employer affordability is genuinely constrained. There was a more mixed response to allowing stressed schemes to take unsupported investment risk. While the majority of respondents did not think schemes with unviable recovery plans should be encouraged to take more risk, some did think this should be an option in exceptional, scheme-specific circumstances. Some respondents deferred to TPR and the PPF.

Other situations respondents identified where schemes might have difficulty meeting the bespoke compliance principles included:

  • multi-national sponsors
  • small schemes
  • weak covenant
  • open schemes with strong covenants
  • schemes at significant maturity
  • charities and NFP
  • sectors subject to economic regulation

Question 52. Trustees’ assessment of additional support in Bespoke arrangements

We asked:

Do you have any views on the framework we set out for trustees to assess the appropriateness of additional support in Bespoke arrangements? If you disagree, what do you suggest?

You said:

Respondents largely supported the proposal to assess additional support in Bespoke arrangements – with the recognition that the Assess/Access/Quantum/Quality approach represents good practice for trustees.

The most common challenge was that Bespoke valuations should not be benchmarked against Fast Track parameters. Instead, the assessment of additional support should be principles-based and left to trustee’s discretion.

Included within the responses were suggestions that additional support structures should be aligned with PPF-compliant structures, have scope to be amended in the future, and have their value regularly monitored. While ‘gold standard’ structures may not be feasible, respondents highlighted that lower-level support can still provide value and get trustees a seat at the table. There were concerns that setting onerous requirements might stifle innovation or dissuade employers from providing additional support.

There was also recognition that different types of schemes may use additional support for different purposes: 

  • Shared cost schemes — to underwrite a longer recovery plan and keep contribution levels lower
  • Not-for-profit employers — as an alternative to providing security if they were concerned it would compromise charitable obligations
  • Open schemes —as a ‘bridge’ to underwriting funding deficits.

Question 53. Accessing additional support

We asked:

When do you think trustees should be able to access the additional support? Does it depend on the Bespoke arrangement and the type of risk that it supports?

You said:

The vast majority of respondents agreed that the triggers for accessing additional support should be scheme-specific and depend on professional advice when required.

Whilst very few respondents called on TPR to define these triggers, common trigger points identified by respondents included:

  • insolvency
  • end of a recovery plan
  • missed targets on the scheme’s journey plan
  • when a scheme reaches significant maturity

Question 54. Assessing the value of additional support

We asked:

Assessing the value of additional support, should trustees be required to assess the stressed value of any contingent asset? What other guidance do you think we should set out on the recoverable value of contingent asset support?

You said:

There was overwhelming support for trustees to consider the stressed value of contingent assets when determining how much reliance can be placed on them. There was a strong preference for TPR’s guidance to be principles-based with worked examples rather than prescriptive.

It was also felt that trustees should determine the best approach for their scheme’s situation, having taken appropriate advice. While some believe advice should always be taken, others felt this should depend on materiality.

Other observations included:  

  • considering alignment with certifying contingent support for PPF levy purposes
  • although contingent support may not be perfect, it acts as an incentive to the parent company not to let the employer fail.

Question 55. Independent valuation

We asked:

Should trustees always be expected to seek an independent valuation of continent assets, or should it depend on asset value and/or type? If this should be based on value thresholds, how should these be defined? How frequently should we expect trustees to seek an independent valuation? Should trustees be expected to regularly monitor contingent asset value in the intervening period?

You said:

Most respondents stated that an independent valuation should be based on the type and nature of the contingent asset. Others suggested it should be based on how material it is to the covenant or the level of reliance placed on it, the volatility in value, and/or the cost and accuracy of an independent valuation.  

Some suggested thresholds may be helpful for guidance on when to seek an independent valuation. However, most felt TPR should take a principles-based approach to valuing and monitoring contingent assets, which should be reasonable and proportionate.

Those that commented on frequency suggested an independent valuation should be completed upon acceptance and/or at least every triennial valuation. Most agreed that contingent assets should be monitored, with suggestions ranging from bi-annually to a minimum of triennially.

Question 56. Guarantees

We asked:
  1. Should we treat guarantee support differently to asset-backed support?
  2. Should trustees rely on guarantee support to change the covenant grade assessment, or do you think in these circumstances the supporting entity should become a statutory employer instead?
  3. Other
You said:

Most respondents thought guarantee support should be treated differently from asset-backed support given their different advantages and disadvantages. Those that did not think they should be treated differently felt the same principles should be considered regardless of the type of contingent asset.

There was an overwhelming consensus that guarantee support should be factored into covenant assessments based on the terms of the guarantee, its legal enforceability and covenant visibility.

The majority agreed that it shouldn’t be a requirement for guarantors to become statutory employers, given it could act as a deterrent, be overly complex and also impractical - particularly if the scheme needs to update its legal structure or if the guarantor(s) were based overseas.

One respondent put forward ABCs as a potential alternative arrangement to help trustees mitigate risks. A few respondents challenged the way TPR were factoring in recovery plans and guarantees covering the long-term objectives into covenant and funding decisions.

Question 57. Other mitigations

We asked:

Can you think of any other types of arrangements which can help trustees mitigate risks?

You said:

A large majority agreed there are various arrangements that can help trustees mitigate risks. The most referred to were letters of credit, surety bonds, contingent contribution mechanisms, negative and positive pledges, subordination of creditor arrangements and formal information-sharing protocols.

Most acknowledged that these arrangements would continue to evolve, which a few respondents said supported the use a principal-based approach rather than a prescriptive one. 

Given the unique number of scenarios, some respondents felt it would be helpful for TPR to provide more examples in its covenant guidance. One respondent also requested more guidance specifically on ABCs.

Q58 Reporting information on additional support

We asked:

Is there any reason why it would be unreasonable to expect trustees to undertake the analysis and provide the information outlined above? Is there additional information that should also be provided to us?

You said:

The majority of respondents felt TPR’s proposed approach was reasonable. Over half of those who did not agree were in favour of some proposals, but not all.

Those not in favour of TPR’s overall approach were concerned the compliance requirements could make contingent support less attractive as an option rather than contesting the proposed approach itself. Some of those in favour of the proposals also emphasised that proportionality was key and care should be taken to ensure that parties are not disincentivised to provide these arrangements. A small number also requested that any disclosure requirements should be as consistent as possible with the PPF’s requirements.

Appendix: list of respondents to the consultation

Association of Pension Lawyers (APL)

100 Group Pensions Committee

20-20 Trustee Services Limited

ABInBev UK Pension Plan

Airways Pension scheme

Altman, Ros (Baroness)

Amalgamated Metal Corporation PLC


ARC Benefits Limited

Association of Electricity Supply Pensioners

Association of Professional Pension Trustees (APPT)

Atkin & Co

Benyon, Geoff

British Telecommunications plc


Cardano Risk Management Ltd

CFA Society of the United Kingdom

Church of England Pensions Board

Club Vita

Colas Rail Limited

C-Suite Pension Strategies Ltd

Ellis, Lyn

Ernest & Young LLP

Eversheds Sutherland

First Actuarial LLP

Freshfields Bruckhaus Deringer

Gowling WLG (UK) LLP


Herbert Smith Freehills LLP

Hutton, Jane

Hymans Robertson LLP


Insight Investment

Kirrin, George


Lincoln Pensions

Lloyds Banking Group


National Grid

O'Brien, Christopher

Osborne Clarke LLP

Pensions Management Institute

Pinsent Masons


Police Superintendents’ Association


Railway Trade Unions ASLEF, RMT and TSSA

Railways Pension Trustee Company Limited

RBS Pension Trustee Limited


RSM Restructuring Advisory LLP

Russel Hurst Pension Scheme Trustees


Social Economic Research

Social Housing Pension Scheme Employer Committee

Spain, Jon

Spence & Partners Limited

Stagecoach Group Pension Scheme

TfL Pension Fund

The Co-operative

The Law Debenture Pension Trust Corporation

The Society of Pension Professionals (SPP)

TPT Retirement Solutions

Trafalgar House Trustees Ltd

UK Power Networks

Unite the Union

United Reformed Church Ministers’ Pension Trust

United Utilities

United Utilities Pension Scheme (UUPS) / United Utilities PLC Group of the Electricity Supply Pension Scheme (UUESPS)

Walton, Neil

Woon K. Wong

Zephyrus Partners

Zurich Financial Services UK Pension Trustee Ltd