The new statutory requirements for DB schemes to have a funding and investment strategy, for ensuring that pensions can be paid over the long term, came into force on 6 April 2024 and will apply to actuarial valuations with effective dates on or after 22 September. Although the underlying Regulations set out some of the detail and key principles, we are still waiting the Regulator’s final DB funding code of practice, the final template of the statement of strategy, the Regulator’s revised covenant guidance and confirmation of its bespoke and fast track regulatory approach.

The Pension Schemes Act 2021 and the Funding and Investment Strategy Regulations have introduced new requirements for DB scheme funding. Trustees will need to determine a funding and investment strategy (FIS) for ensuring that pensions can be paid over the long term and they will need to submit a written statement of strategy to the Regulator. The requirements will apply to valuations with effective dates on or after 22 September 2024.

The new Regulations set out the matters that trustees must take into account (such as scheme maturity, asset allocation and employer covenant), and the principles they must follow, in determining or revising the scheme’s FIS. A key principle is that schemes should be in a position of low dependency on the employer by the time they are “significantly mature”. At that point (which is referred to in the regulations as the “relevant date”), the scheme’s assets should be invested in accordance with a “low dependency investment allocation”. The final draft of the regulations clarified that this does not apply to surplus funding.

The Regulator’s revised DB Funding Code will provide more practical guidance on the new requirements. However, due to the timing of the General Election, this may not arrive in time for 22 September creating some uncertainty for trustees with valuations soon after.

The regulations also include the matters to be considered in assessing the financial ability of the employer to support the scheme, including the timescales over which the trustees can be reasonably certain of continued covenant support. We are also still awaiting updated covenant guidance from the Regulator.

Key Actions in respect of the funding and investment strategy

In order to determine the FIS, trustees will need to:

• agree with the employer the long term objective for the scheme (e.g. buy-out, run-on or consolidation);
• take advice from the scheme actuary as to when the date the scheme will reach significant maturity (or whether it has already) and select the “relevant date”;
• further scrutinise the employer covenant – this should include not just the financial ability of the employer to pay contributions, but the legal covenant e.g. strength of guarantees, the ability to enforce overseas and the legal structures of groups.

The FIS will need to be agreed with the scheme employer, except in some limited circumstances.

Statement of Strategy

Trustees will also be required to prepare a written statement of strategy. This needs to be signed off by the chair of trustees and submitted to the Regulator as soon as reasonably practicable after it has been prepared or revised. The submission process will be set out in the Regulator’s revised DB Funding Code and the Regulator will, following a recent consultation, be publishing template forms for the statement.

Part one of the statement will be the funding and investment strategy itself.

Part two of the statement will cover supplementary matters, including:

• the extent to which the trustees consider the FIS is appropriate and if it is being successfully implemented. Where it is not, what steps the trustees propose to take to remedy the position;
• the level of investment risk the scheme is intending to take and how this will change as the scheme matures;
• the main risks faced by the scheme in implementing the FIS and how the trustees intend to mitigate or manage them;
• an assessment of the strength of the employer covenant, how long it is reasonable to rely on that assessment and the evidence on which this is based; and
• confirmation that the trustees have consulted the employer in respect of part 2 of the statement of strategy and any comments that the employer asked to be included.

The Regulator is proposing to produce four templates for the statement of strategy, reflecting the different information expected from schemes depending on their circumstances. The Regulator has said that each template will provide scope for schemes to reflect their scheme-specific circumstances.

Considering and preparing all this information will be no small task. Whilst the Regulator has acknowledged this in its recent consultation on the statement of strategy templates, it has emphasised that it will “only ask for information that aligns with legislation and ensures the statement of strategy is useful for trustees and for us”. The Regulator has also proposed to adjust some of the information required from trustees of smaller schemes.

Key takeaway

There is not long to go now until the new regime will take effect and, despite there being some pieces of the puzzle that are still awaited, trustees with valuations soon after 22 September should start familiarising themselves with the new requirements that will apply.