Journey planning

This code of practice applies to activities related to valuations with effective dates on and after 22 September 2024. For activities related to valuations with effective dates before 22 September 2024, refer to the 2014 DB funding code (PDF, 401kb, 51 pages).

1. For schemes that have not yet reached the relevant date, the second element of the funding and investment strategy is the trustees’ plan to bridge from the current funding position to the low dependency funding target set in the funding and investment strategy (known as the funding journey plan). This encompasses the evolution of all actuarial assumptions used for the purposes of calculating the scheme’s liabilities, as it progresses towards the relevant date. Trustees should plan for how the scheme will reach a position of being at least 100% funded on a low dependency funding basis on and after the relevant date¹.

Notional investment allocation

2. All relevant actuarial assumptions need to be supportable by a suitable investment strategy. Where the trustees choose an investment strategy for the purposes of deriving and supporting actuarial assumptions, we refer to this as a ‘notional investment allocation’. For example, the current notional investment allocation refers to the investment strategy used to support the scheme’s current funding assumptions. Similarly, the low dependency investment allocation targeted in the funding and investment strategy (also a notional allocation) supports the scheme’s low dependency funding assumptions. We expect that, for most schemes, the actual investment allocation will be the same or similar to the scheme’s notional investment allocation. However, the trustees must invest in the best interest of members and as such actual and notional allocations may differ in some circumstances. This is covered in further detail in Investment and risk management considerations.
3. To determine a suitable funding journey plan, we expect trustees to formulate a concurrent journey plan for the evolution of the scheme’s notional investment allocation over the period to the relevant date (this is known as the investment journey plan). Together, the investment journey plan and the funding journey plan form the whole ‘journey plan’, of which only the funding element is formally part of the funding and investment strategy. As the level of risk taken in deriving actuarial assumptions cannot be meaningfully isolated from the investment risk assumed in deriving them, trustees will need to consider the aggregate risk arising from both the funding and investment journey plans when assessing risk along the journey plan.
4. The investment journey plan should set out a transition from the scheme’s current notional investment allocation to the low dependency investment allocation from which the low dependency funding basis in the funding and investment strategy is derived.

Supportability principle

5. When determining the journey plan, trustees must consider the supportability principle for the level of risk.
   1. The level of risk should be dependent on the trustees’ assessment of the employer covenant. More risk can be allowed for if the scheme has access to sufficient employer cash flows and contingent assets to support this level of risk.
   2. Subject to the above, the level of risk should also be dependent on how near the scheme is to reaching the relevant date. This is so that, subject to the covenant assessment, more risk can be allowed for if a scheme is a long way from reaching the relevant date, and less risk can be allowed for if a scheme is near to reaching the relevant date.

Proportionality

6. The journey plan should reflect the circumstances of the scheme and the employer. The approach that trustees take when assessing the level of risk that can be supported over their journey plan should be proportionate to these circumstances. Trustees of schemes that have one or more of the following characteristics should be able to conclude that the risks being run are supportable without much analysis or a detailed covenant assessment, provided no material concerns with the scheme’s covenant longevity are identified.
   1. The size of the employer is very large in comparison to the size of scheme.
   2. The scheme is already well-funded on a low dependency funding basis, solvency basis, or both.
   3. The journey plan relies on only a small amount of funding and investment risk being taken in the period before their relevant date.
7. Where those circumstances don’t apply, trustees will need to carry out a fuller assessment of the covenant and a more detailed analysis of the level of risk to allow for in the journey plan. Further details of how to assess the covenant are provided in the employer covenant module.

Journey planning periods

8. When considering the level of risk that is appropriate for the journey plan, trustees should consider separately the following two periods of time:
   1. the period over which trustees can be reasonably certain of the employer’s cash flow to fund the scheme (known as the reliability period)
   2. the period from the end of the reliability period and up to the relevant date (known as the post-reliability period)
9. The below sections on journey planning during the reliability period and journey planning in the post-reliability period set out our general expectations for how trustees should approach these two periods of time for their journey plan.

Journey planning during the reliability period

10. During this period, trustees need to satisfy themselves that the level of risk in the journey plan is supportable by the employer covenant.
11. Trustees should consider both the likelihood and monetary impact of risks crystalising, the actions they could take in such situations, and the ability of the employer, or any contingent asset support to be used, to repair any increase in deficit.
12. All trustees should carry out suitable and proportionate analysis to help them understand plausible impacts on scheme assets and liabilities from risk inherent in the journey plan.

Principles for assessing supportable risk over the reliability period

13. We expect trustees to make an assessment of whether the scheme has access to sufficient employer cashflows and contingent asset support over the reliability period to recover both the existing deficit (if any) and any further deficit that could arise from a scheme-related stress event during this period.
14. By doing this assessment, trustees can be confident that they are planning to achieve a fully-funded position on a technical provisions (TPs) basis by the end of the reliability period. If the assessment shows the risk cannot be supported, they should consider changing their funding and investment strategy or seek additional forms of covenant support to ensure that the risk taken is consistent with the supportability principle.
15. The assessment should be based on the investment journey plan and should allow for the expected investment risk and return in that plan, taking account of all contributions and expected benefit payments during that period and include the effects of a stress test consistent with what the scheme uses for its risk management purposes. At the minimum, we expect the test to reflect a downside event with a probability of one-in-six, applying over the reliability period.
16. If trustees are relying on the employer to make future payments to the scheme following a scheme-related stress event, they need to ensure that these payments would be less than or equal to the employer’s maximum affordable contributions over the reliability period.
17. Maximum affordable contributions are defined as the employer’s cash flows (as defined in assessing the employer’s current and future cash flow in the employer covenant module of this code) after the following has occurred.
    1. Reasonable adjustments have been made, where appropriate, for alternative uses of cash to reflect the level of cash flows that are expected to be available to the scheme to recover the additional deficit from a scheme-related stress event. For example, deducting for investment in sustainable growth over the reliability period when such payments are unlikely to be impacted in this scenario.
    2. Deducting deficit repair contributions (DRCs) payable to the scheme and other DB schemes the employer sponsors.
18. To the extent that the employer has agreed to pay some or all DRCs from its liquid assets (such as where cash generation is insufficient to cover annual DRCs), these amounts committed to support the payment of DRCs should also be factored into the calculation of maximum affordable contributions. This will prevent maximum affordable contributions being understated once DRCs are deducted.
19. If trustees are relying on contingent asset support to provide additional funding to the scheme following a scheme-related stress event, they should ensure it satisfies the relevant criteria outlined in the contingent asset support section of the employer covenant module. This should be accessible to the scheme if a scheme-related stress event arises over the reliability period. Examples include, but are not limited to, a third-party contingent funding mechanism that underpins the scheme’s investment risk, or cash in escrow that is accessible if a downside investment scenario arises.
20. There may be limited circumstances where trustees are able to take additional risk based on contingent asset support that is only likely to be accessible after the reliability period, including those that provide an underpin in insolvency. For this to be the case, trustees need to evidence why they are reasonably confident of the value this support would provide when called upon. When deciding whether to take additional risk on this basis, trustees should consider the circumstances in which they can access this value and the likelihood of these circumstances arising. The more remote the circumstances in which the value can be accessed, and the lower the confidence in the value it would provide when called upon, the less reasonable it will be to take additional risk.

Journey planning in the post-reliability period

21. After the reliability period, trustees will need to consider what level of risk is appropriate, and the timing and pace at which the scheme should transition to low dependency by the relevant date. To do this, they should consider the following factors.
    1. The extent to which the employer will be able to continue to support the scheme in the future.
    2. The level of risk being taken during the reliability period.
    3. The extent to which the scheme can rely on contingent asset support in the post- reliability period.
    4. How close the scheme is to the relevant date.

The extent to which the employer will be able to continue to support the scheme in the future

22. When setting an appropriate journey plan after the reliability period, trustees should understand how long they can be reasonably certain the employer will be able to continue to support the scheme (covenant longevity). How the trustees should approach this depends on whether covenant longevity is expected to be longer or shorter than the period to the relevant date and, if it is shorter, the reasons driving this assessment.
23. Where covenant longevity is expected to be longer, more focus should be placed on the other factors set out below when determining an appropriate journey plan in the post-reliability period.
24. Where covenant longevity is expected to be shorter and is driven by a specific event or foreseeable limitation to the covenant, making it unlikely that this assessment will be extended in the future, trustees should plan to move to low dependency by no later than the end of the covenant longevity period.
25. Where covenant longevity is expected to be shorter but is not driven by a specific event or limitation to covenant and therefore there is a reasonable expectation that the trustees’ assessment of covenant longevity will be extended in the future, trustees are not expected to plan to move to low dependency by the end of covenant longevity. However, trustees should be able to demonstrate why the level of risk being run after the period of covenant longevity is appropriate based on the other factors set out below.

The level of risk being taken in the reliability period

26. Where a scheme chooses to run a high level of risk relative to what the employer can support during the reliability period, we expect trustees to assume that the level of risk will reduce starting from the end of the reliability period. However, where a scheme chooses to run a low level of risk relative to what the employer can support during the reliability period, trustees may wish to run this lower level of risk for longer.
27. Some examples of different journey plan shapes are available in paragraph 33 of this module.

The extent to which the scheme can rely on contingent asset support during the post-reliability period

28. Where trustees are placing reliance on contingent asset support during the reliability period to take additional risk, trustees must consider if this should change after the reliability period. This should be considered on a case-by-case basis. It will be dependent on the type of contingent asset and the extent to which the value this support can provide to the scheme may change over time.
29. In most circumstances, we expect reliance on contingent asset support to reduce over time, and therefore the level of risk to reduce. However, there may be limited circumstances where reliance can remain at the same level, particularly where, among other things, the contingent asset has a clear, demonstrable, and readily recoverable value that is not expected to fluctuate materially over time and is not linked to the reliability of employer (or other entity) cash flows. An example of this is security over cash in escrow.
30. Where trustees are relying on contingent asset support to take risk in this period, they need to fully evidence and justify why this is appropriate.

How close the scheme is to the relevant date

31. When deciding on the appropriate level of risk, more immature schemes will be able to justify holding risk for longer, which can be reflected through their de-risking journey plan. Trustees should ensure that the level of risk remains appropriate in the context of the other factors set out above.

Investment de-risking considerations

32. The investment journey plan is intended to bridge the difference over time between the current notional investment allocation (which supports current actuarial assumptions) and a low dependency investment allocation (which supports the low dependency funding basis assumptions), while supporting the evolution of actuarial assumptions along the funding journey plan. Therefore, it is likely that, for most schemes, the investment journey plan will incorporate de-risking based on the change in duration of the scheme as it approaches the relevant date. Trustees should consider the types of assets they plan to disinvest from and those they plan to invest in. Actions associated with de-risking may include:
    1. reducing the level of risk associated with the growth assets
    2. decreasing the overall percentage of assets held in growth assets
    3. increasing the level of matching assets, and reviewing the level of duration and inflation matching between the assets and liabilities
    4. increasing the amount of cash flow generation from matching assets

Choice of journey plan shapes

33. If the investment journey plan involves de-risking, trustees should plan a de-risking approach that suits their scheme-specific characteristics. The following are some examples of common de-risking strategies.
    1. Linear de-risking – where the notional investment risk and return reduce at a constant rate as the scheme matures, creating a smooth path towards low dependency.
    2. Horizon (or ‘lower for longer’) – where the notional investment risk and return before the relevant date is constant (typically lower initially than under the linear de-risking approach), and de-risking to low dependency is expected to occur at once, at the relevant date.
    3. Stepped de-risking – where the time before the relevant date is split into a number of periods, during which notional investment risk and return is constant, reducing each time the scheme transitions from one period to the next.

General considerations

The journey plan and choice of relevant date

34. In determining their journey plan, the trustees should bear in mind that the choice of relevant date will affect the risk in the journey plan. For example, where trustees choose a relevant date well in advance of the date of significant maturity, they will have flexibility to push back the relevant date in the event of adverse experience. The trustees will then have longer to reach full funding and the risk of not being fully funded by the time of significant maturity is reduced.

Journey planning for open schemes

35. For the purposes of journey planning, open schemes can assume an allowance for future accrual and new entrants, which will extend the time the scheme takes to reach significant maturity. This means we would expect that open schemes can allow for taking investment risk over a longer period of time than an equivalent closed scheme with an equivalent employer.
36. We expect any allowance for new entrants and/or future accrual to be reasonable. Our expectations for how trustees will project what the duration of a scheme is expected to be in the future, allowing for new entrants and/or future accrual, are set out in this code’s module on relevant date and significant maturity.
37. In assessing the supportable risk for the scheme over the reliability period, open schemes should include contributions in respect of future accrual and include an allowance for that accrual when considering the TPs at the end of the reliability period.

Journey planning for limited affordability schemes

38. Some schemes will have employers with very low levels of affordability and/or will be poorly funded with a substantial deficit relative to the support that can be reasonably expected from the employer. These schemes may not be able to meet all the principles for assessing supportable risk over the reliability period.
39. This could be because the employer’s affordability is being used to support the existing deficit and there may be no other support available for investment risk. Or the employer’s affordability might be so low that it cannot support the scheme taking any material investment risk.
40. In such situations, we expect trustees to set their journey plan to reflect low reliance on the employer, with limited risk-taking based on the scheme’s maturity, in line with the supportability principle described in paragraph 5 of this module. At the same time, we recognise that in practice the trustees of such schemes may conclude that it is in the best interest of members for them to take some unsupportable risk (in their actual investment strategy) to target payment of full benefits, subject to the constraints set out in the module on investment and risk management considerations.

Other considerations

41. Trustees should consider the feasibility of their investment journey plan, especially where it is likely to drive the evolution of the scheme’s actual investment allocation. For example, we would expect the trustees to consider the following factors.
    1. Their investment governance model and whether it can support the planned de-risking strategy, for example the frequency of reviews and changes to investment allocations incorporated in their plan.
    2. The timeframes for material de-risking, especially at the relevant date. Assuming material de-risking will occur instantaneously or over short timeframes may not be appropriate where, in practice, investment allocation changes may take longer to control risk. This might be the case if the trustees are planning to reduce exposure to illiquid investments, which may require a prolonged transition period.
42. As the scheme’s relevant date is to be assessed using duration, we expect the de- risking in the journey plan to be measured, to some extent, against duration. The journey plan should therefore, as a minimum, plan for transitioning the notional investment allocation to a low dependency investment allocation no later than the relevant date, regardless of the scheme’s expected funding level. In practice, planned de-risking based on duration does not constrain the trustees’ actual de-risking decisions. For example, actual de-risking may be based around ‘triggers’, which are engaged when a scheme reaches a particular funding level.
43. While we expect a scheme’s journey plan to be measured against duration, where the risk taken during the reliability period is supportable, trustees may choose to assume no de-risking until after the end of that reliability period. This is subject to the other factors discussed above and whether the scheme will reach its relevant date during that period. However, if events lead to a material change in the supportability of risk during the reliability period (for example, a material deterioration in covenant), trustees should carry out a prompt review of the funding and investment strategy.
44. At a future valuation, if the assessment of covenant does not change (for example the reliability period remains constant), and the relevant date has not been brought forward, the period before de-risking needs to start can be lengthened.
45. In assessing the supportable risk for the scheme over the reliability period, open schemes should include contributions in respect of future accrual and include an allowance for that accrual when considering the TPs at the end of the reliability period.

Detail of the journey plan in the funding and investment strategy

46. The funding journey plan forms part of the funding and investment strategy, which is subject to employer agreement. It will therefore be reviewed (and, where appropriate, revised) whenever the funding and investment strategy is reviewed as a whole. While the investment journey plan does not constitute a formal part of the funding and investment strategy, we still expect it to be reviewed whenever the funding journey plan is, to ensure that the latter remains supported by the scheme’s planned evolution of its notional investment allocation.
47. The funding and investment strategy will record the funding journey plan, including the current funding level and the funding level trustees intend to achieve on the relevant date, both calculated on a low dependency funding basis. It will also show how the funding assumptions will evolve over the journey plan to the relevant date. Detail on the investment journey plan underpinning the funding will be provided in Part 2 of the statement of strategy. Information required in the statement of strategy on the funding and investment journey plan is set out in the statement of strategy module of this code.

Legal references

¹ Regulation 9 of and paragraph 3 of Schedule 1 to The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 (SI 2024/462) [Regulation 8 of and paragraph 3 of Schedule 1 to The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations (Northern Ireland) 2024 (SR 2024/90)]

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