Skip to main content

Your browser is out of date, and unable to use many of the features of this website

Please upgrade your browser.

Ignore

This website requires cookies. Your browser currently has cookies disabled.

Annual Funding Statement 2021

This statement is for trustees and sponsoring employers of occupational defined benefit (DB) pension schemes. It is particularly relevant to schemes with valuation dates between 22 September 2020 and 21 September 2021 (known as Tranche 16, or T16 valuations).

It is also relevant to schemes undergoing significant changes that require a review of their funding and risk strategies.

Published: 26 May 2021

Key points

  • This statement is primarily for trustees and employers of DB schemes who have valuation dates between 22 September 2020 and 21 September 2021 (Tranche 16).
  • It sets out specific guidance on how to approach valuations under current conditions, what we expect from trustees and employers, and what they can expect from us.
  • Over the three-year period to March 2021, funding levels for Tranche 16 schemes on their technical provisions basis have improved. However, the position for individual schemes will vary greatly compared with our aggregate estimates.
  • Short-term covenant visibility may have improved, but trustees must continue to be alert to the risks of weakening employer covenants and remain engaged with employers as uncertainties continue.
  • Each scheme will need to consider its position individually depending on its own circumstances - the statement is intended to equip trustees and employers with some tools to do so.

Introduction

This statement sets out specific guidance on how to approach valuations under current conditions (including signposting of our views on general risk management practices and current issues facing schemes), what we expect from trustees and employers, and what they can expect from us.

It also provides an update on some topical issues and regulatory developments, which are expected to have a bearing on pension scheme management, now and in the foreseeable future.

We appreciate that events such as the COVID-19 pandemic and Brexit have presented challenges for some businesses and the pension schemes they sponsor. However, we also understand that others have not been as adversely affected and these events may have even created opportunities.

Although it is important for trustees and employers to work together to manage unexpected events, they should also make sure they retain a focus on the long term - most specifically around planning and risk management. The best support for a pension scheme is a strong employer, and we are here to support and provide guidance, and to ensure savers are protected by having well-funded pension schemes.

Feedback from trustees and advisers is that our consistent and targeted approach in recent statements addressing different segments of the landscape is particularly helpful. We believe this approach is still appropriate. Therefore, the format of this year's statement is similar to recent years, but the messages have been updated where appropriate to reflect current market conditions.

The analysis supporting this statement will be published shortly.

We expect all T16 valuations to fully incorporate the principles in our current DB code of practice and associated guidance. You should therefore read this statement alongside the following:

You should also read our COVID-19 guidance for trustees on DB funding and investment, and our guidance for trustees protecting schemes from sponsoring employer distress:

Supplementary guidance aimed at trustees of smaller schemes with limited resources, highlighting the benefits of IRM and how to meet their main objectives through its application:

Our DB funding code consultation

The Pension Schemes Act 2021 (PSA 2021) has now received Royal Assent. Building on the existing, scheme-specific approach to DB funding, it sets out new requirements which will help trustees improve their focus on long-term planning, increase transparency around risks being taken and clarify what is expected of schemes based on their own circumstances.

The government will be consulting on regulations to provide further detail on the requirements in the PSA 2021. We will also be updating our DB funding code in line with the new requirements.

To date, we have conducted the first of two consultations on a new DB funding code. The first consultation focused on proposals for the underpinning principles, our regulatory approach, and ideas on how this could be applied in practice to provide clearer guidelines. For further details, please refer to our interim response to the first consultation (PDF, 246KB , 6 pages).

The new code must be consistent with new legislation, so we will wait for the DWP's consultation on the draft regulations to conclude before we publish our second consultation on the draft code. We expect this to take place towards the end of 2021.

We do not expect the new code to come into force until late 2022 at the earliest.

For the avoidance of doubt, the current regime (as set out in Part 3 of the Pensions Act 2004 and current DB funding code and guidance) applies until the new legislation (PSA 2021 and associated regulations) and the revised DB code come into force. Therefore, we will regulate all T16 valuations according to the requirements of the existing legislation and guidance that is currently in force.

Funding positions generally

The T16 valuations are spread over dates between September 2020 and September 2021. Approximately 25% take place at dates around 31 December 2020, and a little over 50% take place at or near 31 March 2021. Funding positions usually vary depending on the exact valuation date.

Our analysis indicates that, at 31 December 2020, the aggregate funding levels for all T16 schemes was broadly unchanged compared with three years previously. On a more granular analysis, schemes that had hedged interest rate and inflation risks appeared to have slightly improved funding levels while unhedged schemes showed slight deteriorations in funding levels.

During the first quarter of 2021, equities rose both in the UK and globally while the prices of bonds and gilts fell. Consequently, the yield on gilts has risen, and to a lesser extent so have the inflation expectations of investors in the gilts market. Given the above, we expect aggregate funding positions as at 31 March 2021 to be more favourable compared with December 2020 (especially for unhedged schemes that may previously have been behind target).

Over the three-year period to March 2021, our analysis shows that, in aggregate, the funding levels for T16 schemes on their technical provisions (TPs) basis has improved. However, the position for individual schemes will vary greatly compared with our aggregate estimates. This variation will depend on scheme-specific inter-valuation experience, valuation dates, funding assumptions and investment strategies.

Where schemes are still behind target, trustees and employers will need to consider how far they may have strayed from their expected funding position and their longer-term target, and develop strategies to put them back on course. On the other hand, where schemes are now better funded on a TPs basis than was anticipated, or even in surplus, we encourage trustees to remain focused on their longer-term target and their journey towards it.

Each scheme will need to consider its position individually depending on its own circumstances, and our guidance below is intended to equip trustees and employers with some tools to do so.

Considerations for schemes currently undertaking a valuation

Actuarial assumptions and scheme demographics

Events over the last few years have highlighted the importance of trustees understanding, with the help of their advisers, the key assumptions in the models used to advise them. Trustees should consider a range of possible outcomes when considering the prudent TPs basis to adopt. This should enable them to understand the key underlying variables and how sensitive the valuation results are to different assumptions.

Many schemes already use scenario planning as part of their integrated risk management (IRM) framework to help their decision-making, assess risks and set up mitigation strategies. In addition, many employers also use scenarios for their own business planning, so aligning these with pension strategies should be beneficial. We consider the additional work to be well worth the effort and continue to encourage trustees to explore this with their advisers.

When considering scenario analysis, trustees should be aware that future economic circumstances can have an impact not just on investment returns but also on the employer's covenant and, depending on scheme demographics, mortality as well.

Inflation

The UK Statistics Authority plans to align the Retail Prices Index (RPI) with the Consumer Prices Index including owner-occupier housing costs (CPIH), from 2030. Where pension increases are currently linked to inflation, trustees will have to choose their assumptions carefully both pre- and post-2030. Where adjustments to market-implied inflation measures are considered appropriate, these will need to be consistent with the scheme's exposure to inflation within their investment strategy.

Mortality

We recognise there are differing views on the impact the COVID-19 pandemic will have on mortality for pension schemes.

The immediate impact from actual mortality experience over the period to a scheme’s valuation date will be accounted for in the valuation data. Our understanding is that, for most schemes, this impact is relatively low as a percentage of member liabilities but will be scheme-specific and dependent on member demographics. There may be some schemes that also want to allow for known mortality experience over the period since the effective valuation date to the date of signing the valuation. Our views on this are consistent with other areas of post valuation experience mentioned below.

There are divergent opinions among market participants on the impact of COVID-19 on the course of future longevity improvements, which are, as ever, hugely uncertain. We note the arguments on both sides:

  • Much of the analysis suggesting that future longevity improvements will be significantly lower than previously anticipated places heavy reliance on the impact of long Covid, which may not be known for many years. Similarly, it may put heavier reliance on other factors, including the impact the pandemic has had on non-Covid healthcare, and its consequences both in the short and long term.
  • Analysis that suggests there may be future improvements to longevity that offset the above, places more weight on positive factors such as vaccines and associated recent medical advances developed during the pandemic. It may also be influenced by arguments that the pandemic may lead to better lifestyle, environmental and health factors for some.

While the short-term impacts may be known sooner, the long-term impacts from either argument will take some time to become apparent. Scenario planning is a good way of bringing together the relevant factors for a better understanding of their overall impact, but trustees should be clear that any view they take now may fail to materialise later, and they should plan accordingly.

One way to capture the uncertainty from recent events may be to retain a mortality assumption similar to previous valuations and if evidence for different assumptions emerges, any savings from these can be recognised at future valuations.

Another reasonable approach would be to use the latest base mortality tables and projections available, suitably adjusted for scheme experience where appropriate. Consideration will be needed on the weighting given to recent events in these models. Many models do not react well to shocks and abnormal data. The Continuous Mortality Investigation (CMI) have introduced a '2020 weight' parameter into the CMI 2020 projection and their core model disregards data from 2020. If trustees decide to have a material '2020 weight' parameter, we would expect this to be justified.

Overall, our view is that trustees should ensure their mortality assumptions are balanced, evidence-based and derived using a sound methodology. Where trustees wish to make amendments to their mortality assumptions, there should be justification to support this. If trustees decide to weaken mortality assumptions materially from those adopted previously, they should also consider whether monitoring and contingency plans should be put in place in the event that the revised assumptions are not borne out in practice.

Post valuation experience

When preparing recovery plans, trustees can consider taking account of post valuation experience at the date of signing the recovery plan. Trustees can consider the impact on the scheme's assets and liabilities of any significant changes in market conditions and the employer's covenant since the effective date of the valuation. Post-valuation experience must take account of negative and positive events.

The trustees and the employer are reminded that this is not an opportunity to simply pick the most favourable date for agreeing the recovery plan. Trustees should have a credible justification for the assumptions chosen and be content that the plan is appropriate and in members' interests when the schedule of contributions is certified. If conditions later deteriorate, it may be necessary to conduct an inter-valuation review or advance the next valuation.

Conditions at a valuation date could be favourable but deteriorate soon after. We expect trustees who have previously allowed for positive post-valuation experience to also consider any material negative post-valuation changes at future valuations.

Taking into account employer affordability, we would usually expect any changes arising from factoring in favourable post-valuation events to reduce the length of the recovery plan rather than the level of annual payments.

Investment considerations

Liquidity

Given that the majority of schemes are now closed to new members and gradually maturing, trustees should actively monitor and mitigate their liquidity risks alongside other risks such as diversification. Analysis should be proportionate to the scheme, with our expectation being that more robust liquidity risk analysis should include, among other items:

  • stress testing for adverse simultaneous market shifts
  • the extent and composition of derivatives exposure to margin/collateral calls
  • review of the assumptions that might apply in times of severe market stress and the impact they might have on the ability of assets to be liquidated and the values that might be realised

Cessation of banking benchmark for cash-like investments

Where schemes use a swaps-based discount rate in their valuations, they should ensure there is no linkage to either LIBOR (London Inter-Bank Offered Rate) or its European equivalent (EURIBOR) because both measures are being phased out.

Covenant considerations

Covenant assessments

The impact of COVID-19 on businesses supporting pension schemes has varied, with the employer's business sector being a key factor. Employers with limited balance sheet resilience or weak trading profiles prior to the pandemic have been impacted more than others. However, while there is still ongoing uncertainty for businesses, short-term covenant visibility has improved over the last year.

Trustees should consider obtaining independent specialist advice to support covenant assessment. This is particularly important if:

  • the covenant is complex
  • the outlook for any COVID-19 related recovery is unclear
  • Brexit implications appear significant
  • the covenant is deteriorating
  • the scheme has a high degree of reliance on the covenant, for example because it has a large deficit or a high level of investment risk

Employers experiencing corporate distress or acute, near-term affordability restrictions present more challenges than normal. Assessment of distressed covenant and employer affordability, including any associated stress testing, often requires specialist knowledge. Trustees should ensure they are familiar with our protecting schemes from sponsoring employer distress guidance.

COVID-19

We envisage trustees having to deal with employer positions in broadly one of three categories:

  • COVID-19 has had limited impact on the business. There has likely been no balance sheet weakening and cash flow has remained strong.
  • The initial impact of COVID-19 was material but trading has or is recovering strongly. Since the pandemic started, several measures were introduced to help support businesses - including (but not limited to) business loans, job retention schemes and business rate holidays. As they end, and loans are required to be repaid, we anticipate some employers will experience additional short-term liquidity pressures. Any weakening of the balance sheet can be repaired over a short period, and the medium-term prospects have not been negatively impacted.
  • The impact of COVID-19 continues to be material. The pace of recovery is uncertain and could take years, or the business may never fully recover. Short-term affordability is stressed. The balance sheet has weakened due to measures taken to raise additional liquidity and to secure lender support. Medium-term prospects are unclear.

Trustees will need to take a view on their employer's covenant, and their approach to the current valuation could vary depending on which category their assessment falls into.

We believe that it is beneficial for all trustees to consider undertaking stress testing or scenario planning which reflects possible future economic environments. This is especially important for the trustees in the last category who currently face the greatest challenges. Working from the different business and economic scenarios already considered by the employer can be an efficient way to do this. These should enable trustees to consider how covenant support and affordability may be affected under each scenario. It is best practice for trustees to consider more than a single set of forecasts where uncertainty over future trading is high.

We expect that employers should by now have prepared detailed financial projections and updated business plans. These are likely to include multiple potential scenarios. It is important that employers provide trustees with this information where needed to assess the covenant in a timely manner. This should enable appropriate and swift decision-making, which should benefit the employer and scheme members. Where employers are concerned about the confidentiality of projections, including where employers are part of listed groups, we expect trustees and employers (and their advisers) to work together to find a suitable solution, which can include non-disclosure agreements.

Where downside scenarios are not available, or it is not proportionate for trustees to stress the forecasts (for example for very small schemes with much larger employers), trustees should ensure they understand the key variables and factors driving the forecasts.

Where COVID-19 continues to have a material impact on the employer, trustees will need to decide whether there has been a material deterioration in the employer's covenant. They should not assume there will be a full recovery in covenant support without good justification. For such schemes, appropriate review of the funding and investment strategies should be considered to reflect the updated views on the covenant and the current uncertainty.

Trustees should then deal with any changes in pension deficits alongside the assessment they have made of the employer's financial position. They should plan to recover deficits with a focus on the affordability of the employer, while maintaining fair treatment and balancing the sustainable growth of the employer. In circumstances of employer stress and uncertain outlook, we would expect that covenant leakage, for example through dividends, is minimised and that the employer focuses on protecting creditors, including pension schemes.

Brexit

For some businesses, the uncertainty over the employer covenant may be heightened further by the UK’s departure from the EU and consequential changes in trading conditions. In such cases, we also expect trustees to review the employer's covenant to understand whether any impacts are short term or represent a more fundamental challenge. They could also consider the impact of any change to the employer's competitive position, supply chain, ability to access the European market and access to labour force. Where the impacts are more material, the employer's ability to invest to adapt to the new trading relationships could be important. Trustees need to examine how the investment is funded, whether it impacts the affordability of deficit repair contributions (DRCs) and how the scheme will benefit from the investment.

Affordability and DRCs

Where external developments such as COVID-19 or Brexit have had a limited impact on the employer’s business, we expect trustees to take a 'business as usual' approach to setting recovery plans. This means we would not generally expect DRCs to be reduced or recovery plan end dates to be extended. Where employers are reporting strong cash flow generation, we expect trustees to try and reduce the length of recovery plans, especially where they are long and where there are concerns the scheme is being treated inequitably relative to other stakeholders.

Where the initial impacts were material but trading is recovering, there could be some short-term affordability constraints. Trustees should carefully consider any requests to accept a lower level of contributions. We expect any such request to be short term, with higher contributions in subsequent years limiting any extension to recovery plan end dates. Where the employer has recommenced, or continued to make shareholder distributions, we will view this as being inconsistent with the scheme having to agree lower contributions. We also expect any deferred DRCs to be repaid under such circumstances, ideally before any shareholder distributions recommence.

Our experience following the publication of last year’s COVID-19 guidance shows that only a small proportion of employers have asked to suspend or reduce DRCs. Where employers continue to request liquidity support from the pension scheme through DRC deferrals and/or lower ongoing DRCs as part of a revised recovery plan, we expect trustees to obtain suitable mitigations. These could include the following:

  • All dividends and other forms of shareholder distributions to stop while DRCs remain at the lower level.
  • Appropriate incremental increases in contributions, which track corporate health recovery, especially when the scheme has taken on additional funding risk while supporting the employer's recovery. Additional (contingent) contributions should be based on appropriate triggers such as (but not limited to) free cash flow, payments to other creditors, credit ratings and investment performance. Trustees should also consider whether it is appropriate to align the triggers to those included in management's pay and bonus incentive programmes.
  • Equitable treatment of the pension scheme compared to other creditors when trading recovers, and ensuring any additional liquidity generated through lower contributions is not used by the employer to support associated companies unless this will benefit the ability of the employer to support the scheme.
  • Covenant enhancing measures through contingent assets, including charges over assets and parent company guarantees.

Trustees may find employers asking for different contribution structures for various reasons, including short-term affordability constraints, sustainable investment plans and tax planning. The Chancellor's March 2021 Budget statement announced a 130% super-deduction capital allowance for tax purposes from 1 April 2021 until 31 March 2023, and an increase in Corporation Tax to 25% in 2023. Consequently, it is possible that some employers could request to defer DRCs over the short term to take advantage of and/or accommodate these changes. In such circumstances, we expect trustees to treat any request for lower or deferred DRCs consistently with our COVID-19 guidance and the expectations set out in this statement. This could include protecting the scheme through putting in place appropriate contingent assets for the period of the deferment.

We continue to expect trustees to be vigilant of employer covenant leakage, which reduces the ability of the employer to support the scheme. Where trustees believe covenant leakage is not justified, we expect them to seek suitable protections to compensate their scheme for the resulting deterioration in covenant - particularly for schemes with weaker covenants and longer recovery plans.

Covenant monitoring and contingency plans

The strength of the employer covenant can change materially over a short period of time, even in the absence of profound events like those we have seen over the past year. We are pleased to see that most trustees have increased the frequency and intensity of covenant monitoring. We see this as good practice and encourage trustees to continue with it. Indeed, we would warn against reducing the frequency too early, given the significant economic uncertainty that remains - and not until covenant visibility and strength are restored to more stable levels.

Best practice monitoring frameworks involve trustees identifying the key aspects of the covenant to track and deciding when action is required. This is based on appropriate triggers or thresholds, informed by the level of change that could have a material impact on the covenant and therefore the funding or investment strategy.

Where trustees do not rely on wider corporate groups when considering covenant support due to a lack of legally binding support, it is often still appropriate to include and be aware of key financial metrics of the wider group within covenant monitoring frameworks. This is especially important where the wider group is heavily leveraged, distressed or potentially subject to material corporate events, which can all have impacts on the direct scheme employers.

Where the monitoring identifies adverse changes in the covenant, trustees should have in place contingency plans to enable them to react appropriately. Ideally, contingency plans should be drawn up in conjunction with the employer, with agreed trigger points that will result in specified actions taking place. For example, additional cash contributions will be paid if the scheme’s funding level deteriorates more than a specified level. It is not necessary for contingency plans to cover all eventualities or establish enforceable actions in every case. However, trustees should discuss key risks with the employer and the potential options for action so both parties are ready to respond as soon as a trigger is breached. Trustees should be able to demonstrate that these interactions with the employer have taken place and we may ask trustees to share relevant documentation with us.

Corporate transactions

There is a general expectation that there will be an increase in the level of corporate activity as the recovery from COVID-19 progresses. There are likely to be various factors driving this, including distressed employers needing to be recapitalised through restructuring and selling assets or, where unable to recapitalise, going through an insolvency process or restructuring arrangement. Where companies and other financial institutions have built up cash reserves while the uncertainty from COVID-19 prevailed, they may now be looking to use them to take advantage of investment opportunities. The low cost of borrowing has also boosted the ability for companies to pursue debt-funded transactions.

Trustees should be prepared and ready to act in the event of any corporate activity. They should be able to identify detrimental events that affect the employers' ability to meet their obligations to the pension scheme, either on an ongoing basis or in the event of insolvency.

We expect trustees to take a rigorous approach to assessing the impact of any corporate transactions and to negotiate mitigation (where relevant) to protect the interests of members and ensure fair treatment with other creditors. Trustees and employers should ensure they are satisfying our expectations with a suitable audit trail covering considerations made in respect of the scheme. It is important that trustees are informed of any corporate activity early in the process, are provided with the same level of information as other stakeholders, and 'get a seat at the table' during negotiations.

If trustees are working through a valuation process at the same time as a corporate event, this can provide trustees with additional leverage during any negotiations with an employer.

However, in such scenarios, we expect trustees to obtain mitigation for detriment caused by a corporate event independently of the valuation. Then, separately, they should make appropriate changes to funding elements of the scheme's valuation, taking account of the change in covenant and mitigation received. Trustees should consider a suitable valuation outcome and obtain appropriate mitigation to any detriment caused by corporate events. If requested, trustees should be prepared to evidence to us how such scenarios have been managed and that any outcome sufficiently mitigates any detriment.

The Corporate Insolvency and Governance Act (CIGA) came into force on 26 June 2020. This Act introduces new procedures for distressed companies, including a ‘restructuring plan for companies in financial difficulty’ and the ability to arrange a payment holiday for certain creditors (called a moratorium). The CIGA rules are complex, and trustees should seek specialist advice from a restructuring professional since the challenges faced will be case-specific. The Pension Protection Fund (PPF) also has a role in these new proceedings acting as creditor on behalf of the scheme, which trustees should be aware of. The PPF has issued some guidance on this. Trustees should also be aware that many crown debts now have preferential status especially where employers are distressed, and this should be considered as part of the covenant advice where relevant.

Managing risks

We continue to expect trustees to focus on the integrated management of three broad areas of risk:

  • the ability of the employer to support the scheme
  • the investment risks
  • the scheme's funding plans

They should work with their advisers in all these areas to develop an IRM framework and associated governance which focuses on providing trustees with pragmatic and useful information for their decision-making.

Climate change

Trustees should consider the impact of climate change on IRM. We believe that a proactive approach to assessing, mitigating and monitoring climate risk is key to successful saver outcomes. Climate change considerations may impact on the assumptions used in actuarial valuations, the investment strategy and the sponsor covenant. Trustees and employers should be aware that guidance given to actuaries alerts them to the need to factor the effects of climate change in their advice.

Trustees should also be aware of our climate change strategy which, among other things, outlines our expectations that all schemes will comply with existing requirements to publish their statement of investment principles (which should include their policies on stewardship and financially material environmental considerations) and their implementation statement. These disclosures represent compliance with the basics of climate change, and we will be using them to monitor how trustees are using scenario analysis, stewardship and engagement activities to identify and manage risk from climate change.

Long-term funding targets

Paying the promised benefits is the key objective for all schemes. This requires trustees to look ahead and set clear plans for how that objective will be delivered and then manage its delivery within an IRM framework. Good practice we have observed (PDF 2.3MB , 175 pages) (pages 156-7) among schemes that appear to do this well often involves trustees and employers agreeing a clear strategy for achieving their long-term goal, which recognises how the balance between investment risk, contributions and covenant support may change over time as the scheme gets better-funded and more mature.

This leads to a long-term funding target (LTFT) being agreed between trustees and employers. This typically targets a level of assets the scheme would need by the time it has reached significant maturity, such that it allows the scheme to reduce dependency on the employer. This should enable the scheme to be managed thereafter with a high degree of resilience to investment and other risks. Investment and funding strategies in the interim period are then aligned to the LTFT under journey plans where the TPs are the means to becoming fully-funded up to the LTFT. Investment volatility and other short-term considerations often lead to the scheme's funding position at any given date to be above or below the path set. Strategies for managing such departures are also usually agreed within the journey plans. This is consistent with our IRM guidance.

In the current context, schemes with such long-term plans already in place should be able to continue to focus on their LTFT with suitable short-term modifications, and we encourage that. We encourage other schemes to follow similar practice and set a LTFT consistent with how the trustees and employers expect to deliver the scheme’s benefits, and then be prepared to evidence that their shorter-term investment and funding strategies are aligned with it. The PSA 2021, once implemented, will make it a legal requirement for schemes to have a specific long-term strategy designed to deliver an agreed long-term objective. Trustees should consider taking steps to incorporate this approach into their thinking, and agree it with the employer, if they do not do so already. This will help them comply with any such changes.

Scheme maturity

Since the majority of schemes are now closed to new members, we expect scheme maturity issues to assume greater significance for setting funding and investment strategies. In the context of scheme funding, the important consideration is the interaction between:

a) the level of assets, the degree of underfunding and the amount of benefits paid out, and

b) the scheme’s ability to close the funding gap from investments and new contributions in a reasonable timeframe.

We expect advisers to alert trustees to the risks to funding and investment from increasing scheme maturity. As schemes approach high levels of maturity, trustees should ensure the employer is funding to a level where these risks are appropriately managed.

IRM and governance

We are currently consulting on the draft content for the first phase of our new code of practice, which incorporates the contents of 15 of our existing codes of practice, mainly dealing with governance and administration of pension schemes. It also incorporates changes introduced by the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018 (the governance regulations). Once the new code has been implemented (expected to be late 2021), the governance regulations will become effective. Current proposals expect, among other things, all occupational schemes with 100 or more members to carry out and document their first Own Risk Assessment (ORA) within 12 months.

The ORA supplements IRM by providing a process for assessing the management of risks. Once implemented, trustees of relevant schemes will have to document and maintain the following:

  • How they have identified, assessed and decided to manage the key risks of the pension scheme.
  • How they have embedded their own risk assessment into the scheme’s management and decision-making processes.
  • How they are monitoring and assessing the effectiveness of scheme’s risk management system.
  • The remedial actions they have agreed to take as necessary, and how they assess their effectiveness.

Trustees of T16 schemes are reminded that, at some stage during their next inter-valuation period they will be required to carry out and document their first ORA. Documenting their key risks at the present valuation and how they are managing them within an IRM framework should make this task easier.

What you can expect from us

Where sponsoring employers are in distress

COVID-19 continues to have a profound impact on the economy, which is challenging employers and the pensions industry. Trustees are the first line of defence for savers and their pension schemes, and it is vital that they remain alert, prepare, plan and are ready to act as needed.

We will be engaging with schemes if we have concerns over corporate distress, to ensure they are following our guidance. It is therefore imperative that trustees review our protecting schemes from sponsoring employer distress guidance.

There is a useful checklist to reduce schemes' risk of employer distress in Annex 4 of the guidance.

Supervision

We will risk assess valuation submissions we receive in a proportionate way. These risk assessments look at the overall risk profile of a scheme relative to the ability of the employer to support it. It is therefore important that trustees and employers are fully aware of our expectations in this statement and in our wider guidance. Trustees and employers should be fully prepared to justify and explain their approach with supporting evidence.

Our powers

Our suite of powers includes the scheme funding power to direct how a scheme’s TPs should be calculated and how (including over what period) its deficit should be funded. We can use this power when there has been a failure to agree or when the valuation assumptions or recovery plan do not appear good enough to meet the standards required by law. For more information, see our DB funding code, governance sections in the investment guidance and covenant guidance.

We can often achieve appropriate outcomes without using this power. However, we may investigate where we believe trustees and/or employers have not acted in line with our expectations set out here, and in our relevant policy statements, guidance and codes of practice.

The PSA2021 has introduced a package of measures which will make using our powers more efficient and introduces deterrents against behaviour that risks savers’ benefits. The changes in the PSA 2021 will also help us drive better standards across the schemes we regulate.

The new powers included in the PSA 2021 will involve new regulations from the DWP, updating our codes and producing new guidance, all of which should be subject to necessary consultation. We suggest that trustees and employers (and their advisers) engage with any consultations that are carried out.

Key risks trustees and employers should focus on and actions to take

In recent years, we have set out our expectations in tables. We recognise that some broad segmentation according to the key drivers – funding strength, covenant and scheme maturity – should assist trustees in matching their specific scheme circumstances with our guidance.

The tables this year are consistent with those we published last year, with no material changes.

In each table, we have identified the key risks we expect trustees to focus on, and features of the funding plans we expect them to develop, depending on their scheme and employer characteristics. Our feedback from trustees and advisers is that this approach has been helpful. Our guidance from earlier years on the key long-term risks remains relevant for T16 valuations and is reiterated in the tables at the end of this statement.

We remind trustees that these tables are not intended to be exhaustive for each category, nor are they a substitute for reading this statement or taking independent professional advice.

Trustees should first decide how, if at all, their covenant has changed because of COVID-19 and Brexit, where broadly they are in the maturity spectrum, and how good their funding position is relative to their long-term funding target given the period over which they are aiming to achieve it. This should enable them to find the table closest to their situation, our expectations of the risks they need to focus on, and the actions we expect. They should then set about preparing their recovery plans to balance affordability with contributions linked to well-defined triggers, contingency plans and other protections for member security, as outlined earlier in this guidance.

Find your group

The table below should assist trustees in matching their specific scheme circumstances with our expectations.

Select the link of your group below to be taken to your specific group table.

Employer strength Strong / tending to strong employer Weaker employer with limited affordability Weak employer unable to provide support
Funding level
  • Funding level strong
   
  • Funding level on track to meet LTFT
  Stressed scheme with limited or no ability to use flexibilities in funding regime
  • TPs strong
  • TPs weak 
  • TPs strong
  • TPs weak and / or 
 
 
  • RP shorter than seven years
 
  • RP longer than seven years
 
  • DRCs reducing deficit at affordable price
 
  • RP longer than seven years 
Maturity Immature Mature   Immature Mature   Immature Mature  Immature Mature  Immature Mature  
Group

A1

A2

B1

B2

C1

C2

D1

D2

E1

E2

A1 table

Group A1
Characteristics 
  • Strong or tending to strong covenant.
  • Scheme’s funding position is considered to be strong, TPs are strong and recovery plan is shorter than average (less than seven years).
  • Scheme is relatively immature.
Key risks
  • Employer exposed to market risk if scheme is not cash flow matched/hedged.
  • Covenant weakens at the same time as investments underperform.
  • Lack of long term covenant visibility.
  • TPs may not be aligned to the scheme’s LTFT.
What we expect from trustees and employers
Covenant 
  • Where there is a high level of covenant leakage, consider proportionately increased deficit repair contributions (DRCs) and shorter recovery plans.
  • Proportionate covenant monitoring.
  • Clear IRM strategy, with realistic contingency planning for key downside risks.
Investment
  • Set a long-term asset allocation consistent with the scheme’s LTFT.
  • Establish a journey plan to move towards the long-term asset allocation.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
Funding 
  • Agree your ultimate goal for the scheme and set a consistent LTFT.
  • Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale.
  • Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT.
  • If concerned about risk of trapped surplus, consider using escrow, asset-backed contributions (ABCs), and contingency planning.

Back to find your group table

A2 table

Group A2
Characteristics 
  • Strong or tending to strong covenant.
  • Scheme’s funding position is considered to be strong, TPs are strong and recovery plan is shorter than around seven years.
  • Scheme is relatively mature.
Key risks
  • Employer exposed to market risk if scheme is not cash flow matched/hedged.
  • Covenant weakens at the same time as investments underperform.
  • Lack of long term covenant visibility and possibility of sudden material covenant deterioration.
  • TPs may not be aligned to the scheme’s LTFT.
  • Increased risk to employer from greater sensitivity to investment volatility and shorter timescales for correction.
What we expect from trustees and employers
Covenant 
  • Where there is a high level of covenant leakage, consider proportionately increased DRCs and shorter recovery plans.
  • Proportionate covenant monitoring.
  • Clear IRM strategy, with realistic contingency planning for key downside risks.
  • Focus on the resilience of the employer to withstand downside risks over a shorter time horizon.
Investment
  • Set a long-term asset allocation consistent with the scheme’s LTFT.
  • Establish a journey plan to move towards the long-term asset allocation.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
  • Investment and funding plans to be structured to recognise the shorter time horizon, as well as the interplay between volatility in asset prices, investment returns and benefit outflows.
  • Consider your forward-looking liquidity requirements in the light of expected transfer value activity, cash commutation and benefit payments.
Funding 
  • Agree your ultimate goal for the scheme and set a consistent LTFT.
  • Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale.
  • Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT.
  • If concerned about risk of trapped surplus, consider using escrow, ABCs2, and contingency planning.
  • Schemes in surplus or close to surplus on the TP basis should test adequacy of TPs against assets needed to satisfy your LTFT.
  • Extending recovery plan end dates to make good any negative investment returns is unlikely to be acceptable, given the strength of the employer.

Back to find your group table

B1 table

Group B1
Characteristics 
  • Strong or tending to strong covenant.
  • Scheme’s TPs are weak and/or recovery plans are longer than around seven years.
  • Scheme is relatively immature.
Key risks
  • Employer exposed to market risk if scheme is not cash flow matched/hedged.
  • Covenant weakens at the same time as investments underperform.
  • Lack of long term covenant visibility and possibility of sudden material covenant deterioration.
  • TPs may not be aligned to the scheme’s LTFT.
  • Focus on reducing scheme risk by strengthening TPs and recovery plans in the knowledge that the employer has the ability to provide a better overall funding agreement.
What we expect from trustees and employers
Covenant 
  • Proportionate covenant monitoring.
  • Where there is a high level of covenant leakage, proportionately increased DRCs and/or shorter recovery plans should be the norm.
  • In addition to enhancements to the recovery plan, strengthen short-term security through other means such as contingent assets and guarantees where available.
Investment
  • Set a long-term asset allocation consistent with the scheme’s LTFT.
  • Establish a journey plan to move towards the long-term asset allocation.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
  • A focus on trustees to understand, quantify and justify the reliance on investment returns versus DRCs to repair a worse than anticipated deficit.
Funding 
  • Strengthen TPs, increase DRCs and reduce recovery plan lengths.
  • Agree your ultimate goal for the scheme and set a consistent LTFT.
  • Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale.
  • Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT.
  • If concerned about risk of trapped surplus, consider using escrow, ABCs3, and contingency planning.
  • Extending recovery plan end dates to make good any negative investment returns is unlikely to be acceptable, given the strength of the employer.

Back to find your group table

B2 table

Group B2
Characteristics 
  • Strong or tending to strong covenant.
  • Scheme’s TPs are weak and/or recovery plans are longer than around seven years.
  • Scheme is relatively mature
Key risks
  • Employer exposed to market risk if scheme is not cash flow matched/hedged.
  • Covenant weakens at the same time as investments underperform.
  • Lack of long term covenant visibility and possibility of sudden material covenant deterioration.
  • TPs may not be aligned to the scheme’s LTFT.
  • Focus on reducing scheme risk by strengthening TPs and recovery plans in the knowledge that the employer has the ability to provide a better overall funding agreement.
  • Increased risk to employer from greater sensitivity to investment volatility, and shorter timescales for correction.
What we expect from trustees and employers
Covenant 
  • Proportionate covenant monitoring.
  • Where there is a high level of covenant leakage, proportionately increased DRCs and/or shorter recovery plans should be the norm.
  • In addition to enhancements to the recovery plan, strengthen short term security through other means such as contingent assets and guarantees where available.
  • The priority is to ensure the scheme is receiving sufficient cash contributions to meet its needs and is being treated fairly, plus a greater imperative to bolster security through contingent assets and contingency plans.
Investment
  • Set a long-term asset allocation consistent with the scheme’s LTFT
  • Establish a journey plan to move towards the long-term asset allocation.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
  • Investment and funding plans to be structured to recognise the shorter time horizon, as well as the interplay between volatility in asset prices, investment returns and benefit outflows.
  • Consider your forward-looking liquidity requirements in the light of expected transfer value activity, cash commutation and benefit payments.
  • The priority is to protect the scheme and employer from further downside while improving funding position by further cash and/or contingent assets.
Funding 
  • Strengthen TPs, increase DRCs and reduce recovery plan lengths.
  • Agree your ultimate goal for the scheme and set a consistent LTFT.
  • Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale.
  • Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT.
  • If concerned about risk of trapped surplus, consider using escrow, ABCs4, and contingency planning.
  • Extending recovery plan end dates to make good any negative investment returns is unlikely to be acceptable, given the strength of the employer.
  • A stronger focus on improving TPs and recovery plans to align with the scheme’s LTFT.

Back to find your group table

C1 table

Group C1
Characteristics 
  • Weaker employer with limited affordability.
  • Scheme funding on track to meet LTFT, TPs are strong and contributions are reducing deficits at a slower but affordable pace.
  • Scheme is relatively immature. 
Key risks
  • Employer exposed to market risk if scheme is not cash flow matched/hedged.
  • Weaker covenant, may be more susceptible to adverse future events.
  • Covenant weakens at the same time as investments underperform.
  • Lack of long term covenant visibility and possibility of sudden material covenant deterioration.
  • TPs may not be aligned to the scheme’s LTFT.
  • Risk of the employer being unable to pay increased contributions if a downside investment event occurs, or in the event of sustained adverse investment experience.
What we expect from trustees and employers
Covenant 
  • Maximise DRCs without risking sustainable growth plans of the employer.
  • Ensure fair treatment of scheme over all sources of covenant leakage.
  • Consider non-cash funding options, eg ABCs, or guarantees to strengthen security.
  • Proportionate covenant monitoring, with documented evidence of whether trustees consider independent covenant advice is necessary.
  • Where employer is part of a stronger group, seek wider group support through cash and non-cash support.
Investment
  • Set a long-term asset allocation consistent with the scheme’s LTFT.
  • Establish a journey plan to move towards the long-term asset allocation.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
  • Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to asset allocation.
  • Focus on diversification to reduce downside investment risk.
  • Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding-based triggers/flags to monitor).
  • Where there is no (or inadequate) group support, consider reducing the current level of investment risk and running it for longer to slowly reduce the deficit over time.
  • Monitor transfer value activity and consider liquidity issues for the scheme if accompanied by a fall in market value of investments.
Funding 
  • Agree your ultimate goal for the scheme and set a consistent LTFT.
  • Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale.
  • Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT.
  • If concerned about risk of trapped surplus, consider using escrow, ABCs5, and contingency planning.
  • Recognise that the employer may have less resilience to cope with volatile contributions – stress and scenario testing will help you to understand exposures.

Back to find your group table

C2 table

Group C2
Characteristics 
  • Weaker employer with limited affordability.
  • Scheme funding on track to meet LTFT, TPs are strong, and contributions are reducing deficits at a slower but affordable pace.
  • A relatively mature scheme.
Key risks
  • Employer exposed to market risk if scheme is not cash flow matched/hedged.
  • Weaker covenant, may be more susceptible to adverse future events.
  • Covenant weakens at the same time as investments underperform.
  • Lack of long term covenant visibility and possibility of sudden material covenant deterioration.
  • TPs may not be aligned to the scheme’s LTFT.
  • Risk of the employer being unable to pay increased contributions if a downside investment event occurs, or in the event of sustained adverse investment experience.
  • Increased risk to employer from greater sensitivity to investment volatility, and shorter timescales for correction.
What we expect from trustees and employers
Covenant 
  • Maximise DRCs without risking sustainable growth plans of the employer.
  • Ensure fair treatment of scheme over all sources of covenant leakage.
  • Consider non-cash funding options, eg ABCs, guarantees to strengthen security.
  • Proportionate covenant monitoring, with documented evidence of whether trustees consider independent covenant advice is necessary.
  • Where employer is part of a stronger group, seek wider group support through cash and non-cash support.
  • Acknowledge the additional constraint of a shorter time horizon.
Investment
  • Set a long-term asset allocation consistent with the scheme’s LTFT.
  • Establish a journey plan to move towards the long-term asset allocation.
  • Investment and funding plans to be structured to recognise the shorter time horizon, as well as the interplay between volatility in asset prices, investment returns and benefit outflows.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
  • Consider your forward-looking liquidity requirements in the light of expected transfer value activity, cash commutation and benefit payments.
  • Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to asset allocation.
  • Focus on diversification to reduce downside investment risk.
  • Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding-based triggers/flags to monitor).
  • Ensure asset allocation provides sufficient income and liquidity to cope with expected and unexpected benefit cash flows.
  • Consider the volatility of the assets used to provide liquidity to avoid significant selling of assets at lower than expected prices.
  • If expecting high transfer value activity, take action now to protect the scheme against liquidity issues in the event of a market downturn.
Funding 
  • Agree your ultimate goal for the scheme and set a consistent LTFT.
  • Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale.
  • Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT.
  • If concerned about risk of trapped surplus, consider using escrow, ABCs (an asset-backed contribution arrangement (ABC) is a contractual arrangement between trustees and one or more entities), and contingency planning.
  • Recognise that the employer may have less resilience to cope with volatile contributions – stress and scenario testing will help you to understand exposures
  • Acknowledge the additional constraint of a shorter time horizon. Therefore, the LTFT and consistency with TPs is ever more important.

Back to find your group table

D1 table

Group D1
Characteristics 
  • Weaker employer with limited affordability.
  • Scheme’s TPs are weak and/or recovery plans are long (more than seven years).
  • Scheme is relatively immature.
Key risks
  • Employer exposed to market risk if scheme is not cash flow matched/hedged.
  • Weaker covenant, may be more susceptible to adverse future events.
  • Covenant weakens at the same time as investments underperform.
  • Lack of long term covenant visibility and possibility of sudden material covenant deterioration.
  • TPs may not be aligned to the scheme’s LTFT.
  • Risk of the employer being unable to pay increased contributions if a downside investment event occurs, or in the event of sustained adverse investment experience.
  • More urgent need to improve funding and reduce member risk.
What we expect from trustees and employers
Covenant 
  • Maximise DRCs without risking sustainable growth plans of the employer.
  • Ensure fair treatment of scheme over all sources of covenant leakage.
  • Consider non-cash funding options, eg ABCs, guarantees to strengthen security.
  • Proportionate covenant monitoring, with documented evidence of whether trustees consider independent covenant advice is necessary.
  • Where employer is part of a stronger group, seek wider group support through cash and non-cash support.
  • A greater focus on securing wider group support where available.
  • Prioritise the scheme over all forms of covenant leakage.
  • Trustees should give serious consideration to obtaining independent covenant advice to assist them in maximising the support available for the scheme. If trustees decide not to do so, they should be prepared to justify why such an approach is appropriate.
Investment

If adequate formal group support has been conferred, treat as follows:

  • Set a long-term asset allocation consistent with the scheme’s LTFT.
  • Establish a journey plan to move towards the long-term asset allocation.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
  • Trustees should understand, quantify and justify the reliance on investment returns versus DRCs to repair a worse than anticipated deficit.

Otherwise, if there is a reasonable likelihood of the employer continuing as a going concern, treat as follows:

  • Set a long-term asset allocation consistent with the scheme’s LTFT.
  • Establish a journey plan to move towards the long-term asset allocation.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
  • Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to asset allocation.
  • Focus on diversification to reduce downside investment risk.
  • Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding-based triggers/flags to monitor).
  • Where there is no (or inadequate) group support, consider reducing the current level of investment risk and running it for longer to slowly reduce the deficit over time.
  • Monitor transfer value activity and consider liquidity issues for the scheme if accompanied by a fall in market value of investments.
  • Where there are concerns over the financial position of the employer, ensure there is an appropriate investment structure and sufficient liquidity to reduce investment risk quickly if the covenant deteriorates further.
Funding 

If adequate formal group support, treat as follows:

  • Agree your ultimate goal for the scheme and set a consistent LTFT.
  • Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale.
  • Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT.
  • If concerned about risk of trapped surplus, consider using escrow, ABCs7, and contingency planning. Strengthen TPs, increase DRCs and reduce recovery plan lengths.
  • Extending recovery plan end dates to make good any negative investment returns is unlikely to be acceptable, given the strength of the employer.

Otherwise, treat as follows:

  • Seek best possible funding outcome for members in the circumstances.
  • Consider the appointment of a professional trustee with experience of stressed schemes.
  • Be prepared to show evidence of appropriate measures, including review of any generous options and discretionary benefits, cessation of future accrual, consideration of winding up, managing your conflicts, awareness of future funding risks and ability to manage them.
  • Monitor transfer value activity, the assumptions and consider any reductions you believe are appropriate to protect all members.

Back to find your group table

D2 table

Group D2
Characteristics 
  • Weaker employer with limited affordability.
  • Scheme’s TPs are weak and/or recovery plans are longer than around seven years.
  • A relatively mature scheme.
Key risks
  • Employer exposed to market risk if scheme is not cash flow matched/hedged.
  • Weaker covenant, may be more susceptible to adverse future events.
  • Covenant weakens at the same time as investments underperform.
  • Lack of long term covenant visibility and possibility of sudden material covenant deterioration.
  • TPs may not be aligned to the scheme’s LTFT.
  • Risk of the employer being unable to pay increased contributions if a downside investment event occurs, or in the event of sustained adverse investment experience.
  • More urgent need to improve funding and reduce member risk.
  • Increased risk of sudden or sustained adverse investment performance.
What we expect from trustees and employers
Covenant 
  • Maximise DRCs without risking sustainable growth plans of the employer.
  • Ensure fair treatment of scheme over all sources of covenant leakage.
  • Consider non-cash funding options, eg ABCs, guarantees to strengthen security.
  • Proportionate covenant monitoring, with documented evidence of whether trustees consider independent covenant advice is necessary.
  • Where employer is part of a stronger group, seek wider group support through cash and non-cash support.
  • A greater focus on securing wider group support where available.
  • Prioritise the scheme over all forms of covenant leakage.
  • Trustees should give serious consideration to obtaining independent covenant advice to assist them in maximising the support available for the scheme. If trustees decide not to do so, they should be prepared to justify why such an approach is appropriate.
  • A focus on maximising support for the scheme and prioritising scheme liabilities over all forms of covenant leakage.
Investment
  • Focus on minimising unsupported risks

If adequate formal group support has been conferred, treat as follows:

  • Set a long-term asset allocation consistent with the scheme’s LTFT.
  • Establish a journey plan to move towards the long-term asset allocation.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
  • Trustees should understand, quantify and justify the reliance on investment returns versus DRCs to repair a worse than anticipated deficit.

Otherwise, if there is a reasonable likelihood of the employer continuing as a going concern, treat as follows:

  • Set a long-term asset allocation consistent with the scheme’s LTFT.
  • Establish a journey plan to move towards the long-term asset allocation.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
  • Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/ risk mitigation strategies and/or changes to asset allocation.
  • Focus on diversification to reduce downside investment risk.
  • Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding-based triggers/flags to monitor).
  • Where there is no (or inadequate) group support, consider reducing the current level of investment risk and running it for longer to slowly reduce the deficit over time.
  • Monitor transfer value activity and consider liquidity issues for the scheme if accompanied by a fall in market value of investments.
  • Where there are concerns over the financial position of the employer, ensure there is an appropriate investment structure and sufficient liquidity to reduce investment risk quickly if the covenant deteriorates further.
Funding 
  • Focus on improving scheme funding.

If adequate formal group support, treat as follows:

  • Agree your ultimate goal for the scheme and set a consistent LTFT.
  • Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale.
  • Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT.
  • If concerned about risk of trapped surplus, consider using escrow, ABCs8, and contingency planning. Strengthen TPs, increase DRCs and reduce recovery plan lengths.
  • Extending recovery plan end dates to make good any negative investment returns is unlikely to be acceptable, given the strength of the employer.

Otherwise, treat as follows:

  • Seek best possible funding outcome for members in the circumstances.
  • Consider the appointment of a professional trustee with experience of stressed schemes.
  • Be prepared to show evidence of appropriate measures, including review of any generous options and discretionary benefits, cessation of future accrual, consideration of winding up, managing your conflicts, awareness of future funding risks and ability to manage them.
  • Monitor transfer value activity, the assumptions and consider any reductions you believe are appropriate to protect all members.

Back to find your group table

E1 table

Group E1
Characteristics 
  • Weak employer unable to provide support.
  • Stressed scheme with limited or no ability to use flexibilities in the funding regime.
  • Scheme is relatively immature.
Key risks
  • Crystallisation of unsupported investment risk and/or employer affordability weakening further.
What we expect from trustees and employers
Covenant 
  • Where trustees consider that further support is possible (from the employer or wider group), independent covenant advice can support the trustees in negotiations to improve the scheme’s position.
  • Focus on mitigations against further covenant weakening, including cessation of dividend payments, and maximisation of non-cash support (be prepared to show the evidence).
  • Proportionate covenant monitoring using independent experts able to advise on areas where mitigation could be sought, and appropriate mechanisms to detect early signs of further deterioration.
  • If there is a high risk of employer insolvency, trustees should fully explore their options and consider which ones might be deployed to best enhance member outcomes. PPF guidance on insolvency and restructuring should help.
Investment

Where there is a reasonable likelihood of the employer continuing as a going concern:

  • Set a long-term asset allocation consistent with the scheme’s LTFT.
  • Establish a journey plan to move towards the long-term asset allocation.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
  • Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to asset allocation.
  • Focus on diversification to reduce downside investment risk.
  • Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding-based triggers/flags to monitor).
  • Where there is no (or inadequate) group support, consider reducing the current level of investment risk and running it for longer to slowly reduce the deficit over time.
  • Monitor transfer value activity and consider liquidity issues for the scheme if accompanied by a fall in market value of investments.

Where there is a reasonable likelihood of the employer not continuing as a going concern:

  • Where there are concerns over the financial position of the employer, ensure there is an appropriate investment structure and sufficient liquidity to reduce investment risk quickly if the covenant deteriorates further.
Funding 
  • Seek best possible funding outcome for members in the circumstances.
  • Consider the appointment of a professional trustee with experience of stressed schemes, especially in circumstances where the company is already distressed even without the pension scheme.
  • Be prepared to show evidence of appropriate measures, including review of any generous options and discretionary benefits, cessation of future accrual, consideration of winding up, managing your conflicts, awareness of future funding risks and ability to manage them.
  • Monitor transfer value activity, the assumptions and consider any reductions you believe are appropriate to protect all members.

Back to find your group table

E2 table

Group E2
Characteristics 
  • Weak employer unable to provide support.
  • Stressed scheme with limited or no ability to use flexibilities in the funding regime.
  • A relatively mature scheme.
Key risks
  • Crystallisation of unsupported investment risk and/or employer affordability weakening further but limited time for recovery.
What we expect from trustees and employers
Covenant 
  • Where trustees consider that further support is possible (from the employer or wider group), independent covenant advice can support the trustees in negotiations to improve the scheme’s position.
  • Recognising the time horizon is shorter, focus on mitigations against further covenant weakening, including cessation of dividend payments, and maximisation of non-cash support (be prepared to show the evidence).
  • Proportionate covenant monitoring using independent experts able to advise on areas where mitigation could be sought, and appropriate mechanisms to detect early signs of further deterioration.
  • If there is a high risk of employer insolvency, trustees should fully explore their options and consider which ones might be deployed to best enhance member outcomes. PPF guidance on insolvency and restructuring should help.
Investment

If there is a reasonable likelihood of the employer continuing as a going concern:

  • Set a long-term asset allocation consistent with the scheme’s LTFT.
  • Establish a journey plan to move towards the long-term asset allocation.
  • Investment and funding plans to be structured to recognise the shorter time horizon, as well as the interplay between volatility in asset prices, investment returns and benefit outflows.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
  • Consider your forward-looking liquidity requirements in the light of expected transfer value activity, cash commutation and benefit payments.
  • Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to sset allocation.
  • Focus on diversification to reduce downside investment risk.
  • Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding-based triggers/flags to monitor).
  • Ensure asset allocation provides sufficient income and liquidity to cope with expected and unexpected benefit cash flows.
  • Consider the volatility of the assets used to provide liquidity to avoid significant selling of assets at lower than expected prices.
  • If expecting high transfer value activity, take action now to protect the scheme against liquidity issues in the event of a market downturn.

Where there are concerns over the financial position of the employer:

  • Ensure there is an appropriate investment structure and sufficient liquidity to reduce investment risk quickly if the covenant deteriorates further.
Funding 
  • Recognising that the time horizon is shorter, seek best possible funding outcome for members in the circumstances.
  • Consider the appointment of a professional trustee with experience of stressed schemes.
  • Be prepared to show evidence of appropriate measures, including review of any generous options and discretionary benefits, cessation of future accrual, consideration of winding up, managing your conflicts, awareness of future funding risks and ability to manage them.
  • Monitor transfer value activity, the assumptions and consider any reductions you believe are appropriate to protect all members.
  • Be prepared to evidence good reasons for not reducing transfer values for underfunding.

Back to find your group table

Download all tables