DB scheme funding and investment

Defined benefit (DB) pension scheme funding and investment requirements relating to risk management, employer covenant, scheme valuations and recovery plans.

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Valuing your scheme and determining your funding and investment strategy

Your defined benefit (DB) scheme is subject to the statutory funding objective, which means it needs to have appropriate assets to cover its accrued liabilities (known as ‘technical provisions’). If the scheme doesn’t meet the objective, you must put in place a  recovery plan to address the deficit.

To check that the scheme meets the statutory funding objective, you must obtain a full actuarial valuation at least every three years provided that an actuarial report is obtained for each intervening year.

Trustees must also determine and keep under review a funding and investment strategy (FIS) which describes:

• how you intend the scheme to provide benefits over the long term (their long term objective)
• the low dependency funding target, which will include the funding level you intend the scheme to have reached on a low dependency funding basis at a particular date by the time the scheme has reached significant maturity (known as the relevant date)
• the investments you intend to hold at the relevant date
• the funding journey plan from the current funding position to the low dependency target, where the relevant date is in the future

In most cases, the scheme’s FIS will require the agreement of the scheme’s employer. Trustees are therefore expected to work closely and openly with the employer to achieve this.

Defined benefit (DB) funding code of practice

Investment code of practice

Annual Funding Statement

Our Annual Funding Statements (AFS) provide guidance to trustees undertaking valuations. It's relevant to trustees of all DB schemes but is primarily aimed at those who are currently undertaking valuations. The AFS sets out our view in relation to the risks facing schemes with effective valuation dates for that particular year.

Integrated risk management

Trustees are expected to adopt an integrated approach to risk management when developing an appropriate scheme funding solution. We expect you to understand the risks related to the employer covenant, investments and funding, which are all interconnected. You should assess which are key risks and define acceptable parameters within which they seek to manage them.

Investment and risk management considerations section of the DB funding code

Assessing and monitoring employer covenant

A good understanding of the employer’s ability to support the scheme is essential to the trustees’ assessment of the appropriate level of risk that should be undertaken when determining the scheme’s FIS, funding target and, where necessary, recovery plan.

When determining the scheme’s FIS, funding target and, where necessary, recovery plan, it is essential to have a good understanding of the employer’s ability to support the scheme. This will support your assessment of the appropriate level of risk that should be undertaken. Trustees are also expected to regularly monitor the strength of the covenant between valuations and have well-developed contingency plans in place to mitigate against a weakening covenant. 

Assessing employer covenant: detailed guidance

Protecting schemes from sponsoring employer distress 

Trustee Toolkit online learning

The ‘How a DB scheme works’ and 'Funding your DB scheme' modules contain information to support you in considering your funding approach. Log in or sign up to Exchange to use the Trustee Toolkit.