- Work collaboratively with the employer to agree a statement of funding principles, schedule of contributions and, if necessary, a recovery plan.
- Take an integrated approach to managing risks in relation to employer covenant, investment and funding.
- Ensure your approach follows certain funding principles set out in Code of practice 3: Funding defined benefits, including being proportionate and balanced.
- Be prepared to address the implications of failing to put in place an adequate funding solution.
Statutory funding objective
Most defined benefit (DB) schemes need to meet the statutory funding objective, which is to have sufficient and appropriate assets to cover their technical provisions (accrued liabilities).
You should work closely with the employer to agree a:
- statement of funding principles that sets out how the statutory funding objective will be met
- schedule of contributions that is consistent with these principles – for more information, go to contributions
- recovery plan if the statutory funding objective isn’t met – for more information, go to recovery plans.
Managing risks in an integrated way
Risk taking is acceptable but you should understand the risks to the scheme and manage them appropriately.
When considering funding and/or investment risk you should discuss with the employer their risk tolerance and assess their ability to address a range of likely adverse outcomes over an appropriate period.
You should implement an approach which integrates the management of risks in relation to employer covenant, investment and funding. You should understand the risks across all these strands, how they interact with one another and define acceptable parameters for each within which you will seek to manage the scheme.
You should establish a framework to identify, assess, monitor and control these risks effectively. In particular you should put in place an adequate contingency plan which provides a flexible strategy and governance structure to allow you to address likely adverse outcomes.
As well as managing risks appropriately, you should follow a number of other principles when deciding your funding approach:
- work with the employer in an open and transparent manner
- ensure decisions are consistent with your long-term funding and investment targets and your view of ongoing employer covenant strength
- act proportionately given your scheme’s size, complexity and level of risk
- seek an appropriate funding outcome that reflects a reasonable balance between the need to pay promised benefits and minimising any adverse impact on an employer’s sustainable growth and therefore its long-term ability to support the scheme
- adopt good governance standards
- ensure the scheme is treated fairly amongst competing demands on the employer
- having agreed an appropriate funding target, you should agree funding to eliminate any deficit over an appropriate period, taking into account the current circumstances of the scheme and employer.
Implementing your funding approach
Your approach to scheme funding should be in line with your trustee duties under the scheme rules and the law. You must have the appropriate knowledge and understanding of the principles which relate to scheme funding, investment and employer covenant. Go to the trustee knowledge and understanding code of practice.
Your funding solution should be specific to your scheme.
It’s important that you work closely with the employer, including sharing information, to reach funding solutions that strike the right balance between the needs of the scheme and the employer. You should seek independent, professional advice where necessary to help you implement your funding approach. Go to working with advisers.
Given the importance and sensitivity of funding negotiations, it’s vital you manage conflicts of interest properly. You should have a process in place which effectively identifies, documents, monitors and manages conflicts. Go to conflicts of interest.
Annual funding statements
Our annual funding statement provides 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. An annual funding statement sets out our view in relation to the risks facing schemes with effective valuation dates for that particular year.
You can find current and previous annual funding statements, along with supporting analysis, in our statements section.
Failing to agree
It’s important you act in line with your trustee duties and have an appropriate funding plan in place for the scheme within the statutory timescale.
You must report to us as soon as possible if you fail to agree a valuation within 15 months of its effective date. We will expect a summary of what has been agreed, what remains to be agreed, and the steps you, the scheme employer and any other relevant party (eg the scheme actuary) are taking in an effort to comply.
If you fail to agree a valuation we will take enforcement action where necessary. If trustees and employers are working with us in relation to the breach, this may include improvement notices and third-party improvement notices. When considering whether to impose a financial penalty we may consider other factors, for example whether we were notified of the breach in a timely fashion.
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. You must log in or sign up to use the Trustee toolkit.