New DB Pension Funding Regime

The Department for Work and Pensions has recently released its final version of the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024, following a consultation period. These regulations, initially introduced back in 2021, underwent revisions to incorporate feedback from the pensions industry, and adapt to changing economic conditions and government policies.
The DWP emphasises that the updated regulations aim to provide clarity in funding standards while addressing concerns raised. Notably, the final version seeks to strike a balance between ensuring member security and maintaining employer affordability.

Under the regulations, DB trustees must establish, review, and adjust a funding and investment strategy to ensure long-term provision of pension benefits. The maturity of the scheme, asset allocation, and employer covenant are among the factors considered in defining this strategy. As schemes mature, they are expected to demonstrate low dependency on employers concerning both investment and funding.

In response to feedback, the revised regulations aim to accommodate appropriate risk-taking within a scheme’s investment strategy.  One of the significant concepts for the funding regime is ‘significant maturity’.  TPR will set out what ‘significant maturity’ means in the future code.  TPR will also be able to set different dates of ‘significant maturity’ for different types of schemes. Furthermore, the regulations clarify that trustees retain the authority to invest in the best interests of their members, in consultation with employers. Schemes in surplus will not be required to invest the surplus in line with a low dependency investment strategy.

Schemes will be required to submit a “statement of strategy” outlining progress, implementation of funding and investment strategies, and key risks and mitigations. This statement includes a summary of the actuarial valuation, to streamline reporting to TPR.

The regulations also introduce amendments to the Scheme Funding Regulations 2005 concerning the calculation of technical provisions, actuarial valuations, and the conditions for determining an appropriate recovery plan.

Additionally, DB schemes must appoint a chair responsible for signing off on the statement of strategy, ensuring effective governance.
Looking ahead, TPR is expected to release revised guidance, including the DB Funding code of practice and covenant guidance, to provide detail and practical guidance.  TPR will reconsider its ‘Fast Track’ and ‘Bespoke’ approach in light of the consultation responses and the significant changes in market conditions since the original proposals were made. 
The regulations are set to come into force on 6th April 2024, with application to valuations effective from 22nd September 2024.