DWP publishes DB Funding Regulations

The Department for Work and Pensions (DWP) published its revised DB Funding and Investment Strategy Regulations ("Regulations") on 29 January 2024 and confirmed that, subject to parliamentary approval, the Regulations will come into force from 6 April 2024 and will apply to actuarial valuations of defined benefit pension schemes from 22 September 2024.

Under the Regulations, trustees of DB pension schemes are required to have a funding and investment strategy (prepared alongside each actuarial valuation) for ensuring that pension scheme benefits can be provided over the long term. The trustees must consult with the sponsoring employers on that strategy. The strategy must set out the funding level, defined as a ratio of assets to liabilities, and the investments that trustees or managers intend the scheme to have at a 'relevant date' on which the scheme is estimated to reach "significant maturity". The funding and investment strategy must set out a journey plan to that funding level.

The trustees must set that "relevant date", which is the date when the DB scheme is estimated by the scheme actuary to reach "significant maturity". "Significant maturity" refers to the date when the scheme reaches a duration of liabilities which is specified by the Pensions Regulator.

At and after the relevant date, as a minimum, schemes will be required to be fully funded on a basis of "low dependency" on their sponsoring employer, with their investment allocation and funding basis set accordingly. Low dependency on the employer means that no further contributions are (reasonably foreseeably) expected to be required to meet the scheme's liabilities.

The "low dependency" investment allocation requires that scheme assets be invested in such a way that the value of the scheme assets relative to the value of the scheme liabilities (the funding position) is "highly resilient to short-term adverse changes in market conditions", so that no further employer contributions are expected to be required to provide scheme benefits. The Regulations will require scheme assets to be invested in investments with "sufficient liquidity" to enable the scheme to meet expected cashflow requirements and make reasonable allowance for unexpected cashflow requirements.

The chair of trustees will need to sign the required statement of funding and investment strategy. The statement of strategy will have to be submitted to the Pensions Regulator in a form specified by TPR.

The fundamental principles contained in the draft Regulations have been carried through to the final form of the Regulations, but DWP has sought to make additional changes to allow more scheme-specific flexibilities. In this regard DWP has sought to revise the Regulations to:

• Make clearer the flexibilities that were intended within the draft Regulations (for example, the Regulations do not constrain actual investments and mature schemes can invest in a wide range of assets);
• Provide reassurance that sponsoring employers may invest in the sustainable growth of their businesses and this can be factored into consideration whether proposed employer contributions are affordable; and
• Make it explicit that open schemes can take account of new entrants and future accrual when determining when the scheme will reach significant maturity.

The Regulations are closely tied to the Pensions Regulator's new DB Funding Code of Practice (the "Code"), which is awaited following TPR's consultation in December 2022. The Code is expected to come into force at the same time as the Regulations, so we expect the revised Code to be published in the Spring. The Code will be needed to supply the required detail as to what is meant by "significant maturity" and "low dependency".