NEWSLETTER    |     February 26, 2024

Dawn of a New Scheme Funding Era

The new funding regime introduced by the Pension Schemes Act 2021 (“PSA 21”) has taken another step towards implementation.

The Occupational Pension Schemes (Funding and investment Strategy) Regulations have been published by the Department for Work and Pensions and are due to come into force on 6 April 2024, but practically only affect valuations from September 2024.

Background  

The PSA 21 introduced new requirements for defined benefit (“DB”) schemes to have a funding and investment strategy which should include the funding level the scheme intends to achieve.  Draft Regulations were published and consulted on.  The updated Regulations, which include details of the requirement for each new valuation to have a long term objective, a funding and investment strategy and a statement of strategy, have now been published.  The updated Regulations seek to make the funding standards clearer.

What is changing? 

Trustees will need to produce a funding and investment strategy and submit a written statement of strategy to the Pensions Regulator (“TPR”).

The new requirements will apply no later than 15 months after the effective date of the first actuarial valuation on or after 22 September 2024.  This means that schemes will have time to ensure they meet the new requirements.

Funding and Investment Strategy

The funding and investment strategy will have to set out the funding levels that the trustees intend their scheme to achieve by a particular date and how this will be achieved.  The funding and investment strategy will have to be agreed with the employer.

The key principle of the funding and investment strategy will be a requirement for schemes to be in a state of low dependency on the sponsoring employer by the time they are significantly mature (the maturity of the scheme being a measure of how far through its lifetime a scheme is on actuarial advice, based on measurements set by TPR).

Low dependency on employer means assets are invested in in such a way that the value of assets relative to the value of liabilities is highly resilient to short-term adverse changes in market conditions, so that further employer contributions are not expected to be required to make provision for the scheme’s liabilities.

The low dependency funding basis will also be used by the actuary to estimate the funding level as at the effective date of the relevant actuarial valuation.

The Regulations have been updated to make it clear that the objective to invest in line with low dependency investment allocation does not apply to surplus funding.  This should give more flexibility to schemes on how to invest surplus.

The funding and investment strategy must be updated as soon as reasonably practicable after any material change in the circumstances of a pension scheme or its employer.  This could mean that the investment and funding strategy will need to be updated often.

Written Statement of Strategy

The Regulations set out what needs to be covered in the written statement of strategy although TPR will have discretion as to the level of detail.  The written statement of strategy will have two parts.

  • Part 1 will be the funding and investment strategy itself.
  • Part 2 will set out the assessment on whether the funding and investment strategy is being successfully implemented, including any remedial action the trustees intend to take.

Part 2 of the written statement must be reviewed and, if necessary, revised as soon as practicable after any review of the funding and investment strategy, whether or not the funding and investment strategy itself is revised.

The written statement of strategy must be:

  • submitted to TPR as soon as reasonably practicable after it has been prepared or revised; and
  • signed off by chair of trustees. If a trustee board does not have a chair, it must appoint one to meet this requirement.  This means that indirectly DB schemes will be required to appoint a chair of trustee.

Further detail on the new requirements will be set out in the revised DB funding code which is expected later this year.

Next steps

The deadline for meeting the new requirements, especially coupled with all the other new requirements coming into force over the next 12 – 18 months, will be here before we know it.  Schemes should start thinking about how they will satisfy the new requirements now and work with their legal and actuarial advisers to do so.

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