- The Pension Schemes Act 2021 (PSA 2021) creates a new requirement for trustees of defined benefit (DB) schemes to have a scheme-specific funding and investment strategy.
- Trustees of DB schemes will be required to report on this strategy to the Pensions Regulator (TPR) in a new statement of strategy (sometimes referred to as a “Chair’s statement”).
- The scheme’s technical provisions (calculated by the actuary for valuation purposes) must be consistent with this long-term strategy.
- Regulations will set out the exact timings and content requirements for the strategy and statement, and open DB schemes may be treated differently to closed DB schemes. It is, however, unlikely that the new regime will apply to valuations before 2022 and may be delayed beyond that.
When will the new scheme funding rules come into force?
It isn’t entirely clear at this stage when the new scheme funding rules will come into force. The pensions industry has been operating on the assumption that they will apply to valuation dates falling in 2022. It is, however, possible that the government will decide to defer the new regime as part of its COVID-19 easements aimed at letting the economy recovery.
The scheme funding regime will only go into full force with the finalisation of TPR’s code of practice on scheme funding. The first half of consultation on the new code of practice on scheme funding was carried out in 2020 and the second half is expected in the second half of 2021. It is therefore unlikely that the revised code of practice will go into force before Q1 2022.
What will the new scheme funding rules require?
The requirement to implement a funding and investment strategy has been introduced to protect members and strengthen TPR’s hand in considering when/how to use its enforcement powers
The PSA 2021 requires trustees to prepare, and from time to time review and revise, a funding and investment strategy for ensuring benefits can be provided over the long term (the Strategy).
The Strategy must state the funding levels the trustees intend to achieve by certain “relevant date(s)” and what investments the scheme will hold at those relevant dates. Regulations will be published to set out:
- the principles the trustees must consider when determining the Strategy;
- the level of detail required in the Strategy; and
- the ‘relevant date(s)’ and how often the Strategy must be reviewed/revised.
DB schemes already have a Statutory Funding Objective, which requires the scheme to have sufficient and appropriate assets to meet its technical provisions as set by the scheme actuary. Once the trustees have adopted a Strategy the technical provisions must be consistent with the Strategy (and should be amended if necessary to ensure consistency).
Trustees are also required to issue a “statement of strategy” to TPR as soon as reasonably practicable after deciding the Strategy. TPR has power to direct trustees to amend the Strategy.
The statement of strategy must set out the Strategy and:
- an analysis of the extent to which the Strategy is being successfully implemented (along with any steps needed to remedy any unsuccessful areas);
- the main risks faced (and how these are being mitigated); and
- the trustees’ impressions of any major decisions taken in relation to the Strategy.
Trustees must consult with sponsoring employers when preparing the statement, and regularly review it. Regulations will be published in future to set out the format, content and review periods for the statement and how often it must be sent to TPR (including the extent to which it must be included in scheme valuations and recovery plans when these are sent to TPR).
The statement will need to come from the Chair of the trustees. If the trustees do not have a Chair they must appoint one for this purpose.
Failure to prepare a Strategy and statement could result in a fine of up to £50,000.
What does this mean for trustees?
Trustees of DB schemes should, if they are not already doing so, be agreeing a long-term strategy for their scheme with the sponsoring employers. Keeping a clear audit trail of those discussions will be important in the event TPR challenges the trustees on their proposed approach.
Once a long-term objective has been decided upon, trustees should work with their actuarial advisers (with legal input as needed) to prepare a statement of strategy (Chair’s statement) and ensure that this is consistent with the scheme’s technical provisions.
What does this mean for scheme sponsors?
Employers should engage with their trustees on the long-term vision for the DB scheme. The target is just that, it is not a binding obligation on sponsoring employers, it is a means of driving the DB scheme’s funding and investment structure towards a long-term goal which is suitable for all parties.