Statement of strategy: consultation document

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About this statement of strategy consultation

The statement of strategy forms part of a package of legislative and regulatory measures designed to improve the security and sustainability of defined benefit (DB) pension schemes.

In this consultation, we are seeking views on our proposed approach to the statement of strategy, including the proposed form of the document, and the type and extent of the information that will need to be submitted.

We propose the following.

• The statement of strategy should be in a standard form and follow a set template, which we will provide*.
• We will produce separate templates to reflect that schemes will have to provide slightly different information depending on whether they have reached the ‘relevant date’, or whether they are taking a Fast Track or Bespoke approach.
• We will request less information from smaller schemes.

*Regulation 18 of the draft FIS regulations requires the statement of strategy to be submitted in a form as set out by us. To make this process easier for trustees and to remove some of the compliance risk, we are proposing that this should be a standard form provided by us.

What we want to understand from this consultation

We want to understand whether:

• this proposed approach raises any challenges or unintended consequences
• the proposed statement of strategy template is clear and fit-for-purpose
• there are any issues with trustees providing the supplementary information proposed to be included in the statement of strategy

We want to know if our proposed approach works for you. This is important, as failure to submit the statement of strategy in a form as set out by us will be a breach of the law.

Consultation pack

Our consultation pack includes:

• this statement of strategy consultation document – our proposals for the format of the statement of strategy and the information we propose to collect
• an example draft statement of strategy template for a scheme submitting a Bespoke valuation submission before the scheme’s relevant date, which we have populated with synthetic data to illustrate how a completed one might appear
• a worked example of how we expect maximum affordable contributions to be evidenced, where required
• a data list – this is a reference list of the data and information we anticipate DB scheme trustees will be required to provide for insertion into the template

Who this consultation is for

We would like to hear from any interested party, in particular trustees of DB schemes, their advisers and any representative organisations.

Responding to this consultation

This six-week consultation closes on 16 April 2024. Please respond to the consultation using the online response form. Our new consultation platform should make it quicker and easier for you to respond to our consultation and allows us to collect, analyse and consider responses more efficiently and effectively. You do not need to answer all questions to respond to this consultation.

You can also respond to the consultation by:

Email: 

statementofstrategyconsultation@tpr.gov.uk

Post: 

The Statement of Strategy Consultation Team 

The Pensions Regulator

Telecom House

125-135 Preston Road

Brighton

BN1 6AF

The DB funding framework and the statement of strategy – wider timetable

In 2018, the government announced a package of legislative and regulatory measures aiming to protect DB schemes, including proposals relating to DB scheme funding which are being progressed through:

• the Pension Schemes Act 2021 – received Royal Assent in 2021
• the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations (the FIS regulations) – laid in January 2024
• the revised DB funding code – currently in draft, which we consulted on in December 2022
• statement of strategy – this consultation is seeking views on our proposed approach
• supplementary guidance – our covenant guidance consultation is expected in the summer

We also consulted on our twin track regulatory approach of Bespoke and Fast Track in December 2022, including our proposed Fast Track parameters.

We expect the new funding and investment strategy legislative requirements to come into force in April 2024, and to apply to scheme valuations with effective dates on and from 22 September 2024.

We expect that our revised DB funding code will be laid in the summer, to be in force in September 2024. We are engaging closely with industry as we finalise the code to reflect the FIS Regulations and responses to our December 2022 consultation.

The existing DB funding code and related guidance will continue to apply until then.

We are consulting on the statement of strategy while the DB funding code remains in draft, as we wish to provide stakeholders with a good understanding of how we propose that the different elements of the funding regime work together before the code is finalised.

What’s informed our approach

Our approach to this consultation is consistent with the proposed framework set out in our consultations on the revised DB funding code and on Fast Track and our regulatory approach. It is also consistent with the draft FIS regulations, as laid before Parliament.

Our proposals have also been informed by:

• responses to our previous consultations
• feedback received through an extensive industry engagement programme
• our evolving regulatory approach, particularly to ensure effective targeting of regulatory activity to where it will have the most impact
• our desire to keep additional burden to a minimum and streamline the data submission process

The proposals in this consultation should not be viewed as providing any confirmation on what the final FIS regulations and revised DB funding code will require. The final statement of strategy will reflect the final form of the FIS regulations and our DB funding code, and will take into account responses to this consultation. We will continue to engage with industry throughout this process.

Our approach to the statement of strategy

Background to the statement of strategy

The statement of strategy forms part of a package of measures designed to support trustees in planning and managing their DB scheme funding over the long term. Building on the existing Part 3 regime, the new measures aim to:

• introduce greater clarity on key legislative funding principles by embedding existing good practice
• encourage greater trustee focus, transparency and accountability on long-term planning and risk management
• support more effective and efficient regulation of DB funding

Under the new requirements, trustees will be required to determine a FIS – a plan for how trustees will deliver benefits over the long term. The FIS will set out how the trustees plan to reach low dependency funding by the time the scheme is significantly mature. Trustees will also set out how the scheme funding will evolve to low dependency in a journey plan. Funding risk must be supported by the employer covenant and, subject to this, the maturity of the scheme.

Once trustees have determined or revised the FIS, they must produce a statement of strategy outlining their approach to funding and risk management.

The statement of strategy is made up of two parts.

• Part 1 – the FIS, which requires employer agreement.
• Part 2 – supplementary matters, such as an explanation of whether the FIS is being successfully implemented, and key risks faced by the scheme in implementing the FIS and how these are being managed. This requires consultation with the employer.

The statement must be signed by the chair of trustees. If the scheme does not have a chair, the trustees must appoint one.

The statement of strategy aims to be a useful long-term planning and risk management tool for trustees. On the basis that what gets reported gets managed, greater trustee transparency and accountability could help improve risk management practices, driving greater security of member benefits. The statement of strategy will facilitate engagement between trustees, employers and us. This will in turn support better and clearer communications to members.

The statement of strategy will also ensure that we have the information we need to regulate effectively. We will receive more and better-quality information upfront, avoiding protracted negotiations and in some instances the use of powers to get the information needed to assess the approach, methods and assumptions underpinning the trustees’ strategy.

Greater clarity upfront on the decisions being made by trustees and employers and the level of risk being carried by schemes will support a more effective ongoing assessment of the DB pensions landscape. This should help us target our resources more efficiently to schemes that require our attention.

How the statement of strategy interacts with other information provided to us

While the existing actuarial valuation and new FIS requirements are separate, they are interlinked, and the FIS regulations set out how long-term planning requirements need to be included within an actuarial valuation. Trustees must therefore consider the FIS and scheme valuation together. We have designed the statement of strategy template to facilitate this.

When the new regime is in force, trustees of all schemes, regardless of whether they are in deficit, will be required to submit their actuarial valuation to us. From 22 September, trustees must also submit a statement of strategy. This will include the scheme actuary’s estimate of maturity at the effective date of the valuation, the expected maturity at the relevant date, and the funding position at the relevant date calculated on a low dependency funding basis. The valuation assumptions must be consistent with the assumptions determined in the FIS.

Trustees of schemes with a technical provisions deficit will also need to submit a copy of their recovery plan and schedule of contributions, as they do currently. However, there will no longer be a requirement for them to submit a summary of the information in the actuarial valuation. Instead, this information will be provided by trustees of all schemes as part of the statement of strategy.

While the statement of strategy and the actuarial valuation may be signed at different dates, we anticipate this may often be done together as both documents could be prepared in parallel.

Some of the information we propose to ask for in the statement of strategy we already collect through the DB scheme return. This information – including the scheme information, part 3 valuation information, buy-out valuation information and some limited information on covenant support – is already provided to us twice through the actuarial valuation and the scheme return.

Where possible, we are looking to streamline the information collection to ease the burden on trustees and plan to investigate removing any unnecessary duplication.

Evolving how we regulate

We want to improve our regulatory oversight and ensure we are effective, efficient and proactive in carrying out our statutory functions. We also want to identify and mitigate risks across all occupational pension schemes, without unnecessarily increasing trustee burden.

We are evolving how we regulate to become a data-led organisation, and we’re taking the opportunity provided by the developing funding regime to review our end-to-end approach to the regulation of DB scheme funding.

We will look at the information we collect from schemes through the statement of strategy and related submissions, making sure we are getting the right information provided to us in the right way. We are also looking at how this information is provided to us, and how we use it. We go into more detail in the template section.

We are currently developing our systems and processes to ensure the process for sharing data with us is as simple as possible and we are able to process and analyse the data we receive more efficiently. We will continue to engage with the industry as we develop these systems.

Proportionality

It is important that we deliver the benefits of the statement of strategy for trustees, members and us, without unnecessarily increasing trustee burden and cost for schemes. This was a key theme raised in consultation responses and engagement with industry as we have developed our thinking on the information we collect and how this is submitted to us.

As a proportionate regulator, we only wish to ask for information that aligns with legislation and ensures the statement of strategy is useful for trustees and for us.

We understand from external engagement that trustees should have most of the information we propose to collect already, and the new data items should, in most instances, be straightforward to produce.

Proportionality was also a key consideration when developing our template proposal for the statement of strategy. We will ask for different levels of information depending on whether trustees are submitting a Bespoke or Fast Track valuation submission, and we will also consider whether a scheme has reached its relevant date. We set out in more detail how we propose to ask for different levels of information in the statement of strategy proposed template section.

Smaller schemes

We propose to adjust some of the information required from trustees of smaller schemes. This is because we recognise the potential burden, and additional costs of compliance will often be significantly larger for smaller schemes when considered as a percentage of scheme liabilities or assets. Smaller schemes also have different characteristics to larger schemes – for example, they are more likely to be prone to 'concentration risk' where a high percentage of the liabilities relate to a small number of individuals. This in turn makes forecasting future scheme benefit cashflows less reliable. The variability in any projected cashflows is also likely to be higher.

We propose to include two definitions of smaller schemes to align more closely with how actuarial and investment information is currently segmented by size. The following sections go into more detail.

Actuarial information for smaller schemes

We are proposing to adjust some of the actuarial information we will ask trustees of smaller schemes to submit. For these purposes, we have defined smaller schemes as those with fewer than 100 members. This is consistent with various aspects of legislation, and reflects how the industry generally recognises smaller schemes.

It is our intention that trustees of smaller schemes will:

• not be asked to submit scheme benefit cash flow information as evidence for their estimate of how their scheme maturity will change in either Bespoke or Fast Track submissions, and
• have the option of providing less information to evidence their funding assumptions by being able to provide single rates rather than a full yield curve in relation to the discount rate methodology and other assumptions including inflation and pay increases

Investment information for smaller schemes

For investment purposes, we have defined smaller schemes as those with less than £30 million in s.179 liabilities, as this is consistent with the definitions in the scheme return. While trustees provide the actual investment allocation in the DB scheme return, they will provide the notional investment strategy in the statement of strategy. We believe that it would be easiest for smaller schemes to provide information consistently. So, the level of detail will depend on whether the scheme trustees opt to be treated as a “Tier 1” scheme for scheme return purposes, which they can do if the scheme has less than £30 million in s.179 liabilities. By aligning the information about investment strategy with the information about actual investments already submitted in the scheme return, we hope to relieve any additional burden on trustees of having to provide similar information in a different way.

The statement of strategy proposed template

The draft FIS regulations require the statement of strategy to be submitted in a form set out by us. We propose that the statement of strategy is standardised as in the example published with this consultation.

We prefer this approach of providing a pre-defined template to the alternative of allowing for more scheme-specific interpretations of what to include in a statement of strategy. From our experience with current valuation documents, there is a lack of consistency between documents in the information provided and also in their quality. Poor quality documents are unlikely to be useful to us, trustees, or members. They are also more likely to lead to further engagement with trustees as we seek to understand compliance. A lack of consistency would also make it more difficult for us to use the information to support our intended regulatory approach.

We think our proposed approach to the statement of strategy deals with these issues and has the following benefits.

• Our expectations are clear on the information to be provided so there is higher quality and more consistency across schemes, which will benefit trustees and members, and will give us greater regulatory oversight.
• It reduces unnecessary burden and costs. DB scheme trustees can focus on providing the right information and answering specific questions rather than designing a structure and narrative for the document in its entirety.
• Trustees can focus on the right areas to ensure they are providing the right level of evidence and explanation in setting out their risk management approach.
• It removes the risk for trustees that the structure of a statement of strategy may not be compliant.
• We can better use the information to support more targeted, effective and efficient regulation.

We are proposing four templates to reflect that we will require different information from schemes depending on their circumstances:

• Fast Track before the relevant date
• Fast Track on or after the relevant date
• Bespoke before the relevant date
• Bespoke on or after the relevant date

Within each template there is further scope for schemes to reflect their scheme-specific circumstances.

We have the discretion to ask for different levels of detail from different schemes in Part 2 of the statement of strategy, depending on their circumstances. This discretion was provided in the FIS regulations, which were laid in Parliament in January. Flexibility is fundamental to our proposed twin-track regulatory approach and our ability to be a proportionate regulator.

This discretion will also allow us to adapt our approach to take account of changing circumstances over time. We have seen a great deal of change in the pensions landscape and we expect that change will continue. This flexibility will ensure that the regulatory regime can continue to evolve without unnecessarily increasing trustee burden.

Differences between Bespoke and Fast Track templates

We previously consulted on our proposed twin-track approaches to assessing valuations - Fast Track and Bespoke. We will continue to engage with industry as we finalise our approach and the final statement of strategy will be updated to reflect this where appropriate.

Bespoke

The Bespoke approach is principle-based with clear boundaries derived from the legislative requirements and the expectations in our DB funding code. It offers trustees greater flexibility for scheme-specific funding approaches.

Trustees will be asked to provide more detailed information upfront in their statement of strategy on how their approach is compliant and risks are being managed.

We don’t expect the Bespoke approach to be unnecessarily onerous, and anticipate the level of detail provided will vary depending on the level and complexity of the risk being taken.

Once we receive a Bespoke submission, we may want to look at the statement of strategy in more detail or undertake further engagement with the trustees to fully understand the approach. We expect trustees to focus on demonstrating in the statement of strategy:

• that the funding and investment risk is supportable by the employer covenant and in line with the maturity of the scheme
• that the recovery plan meets the ‘reasonable affordability’ principle
• that the long-term strategy is appropriate and in line with the legislation

We will take a risk-based and outcome-focused approach and we expect many Bespoke valuation submissions will not result in further engagement from us.

We anticipate this new approach will help us target our engagements efficiently. It should also be more transparent, giving pension scheme trustees greater clarity on our regulatory approach, and enable us to target our data requests, reducing the burden for some schemes.

Fast Track

Fast Track represents our view of tolerated risk for engagement (ie where a scheme follows a Fast Track approach it is unlikely that we will want to engage). If a scheme meets a series of Fast Track parameters, trustees can expect to provide less information in the statement of strategy, particularly in relation to covenant. However, Fast Track is not risk free and will not be appropriate for all schemes.

As Fast Track acts as a filter for our assessment of valuations, we will undertake a high-level review, which will verify that valuation submissions meet the Fast Track parameters. For most schemes, we do not anticipate needing to engage further with trustees on their submission.

This twin-track valuation submission approach contrasts with the current position where each valuation could be considered Bespoke, but without sufficient high-quality, relevant information being available upfront to efficiently assess risks and compliance.

The Fast Track template will be very similar to the Bespoke template, but will include less information. We propose that the Fast Track template will:

• not require commentary on the extent to which the FIS remains appropriate
• not require information on the level of investment risk in the journey plan
• require less information evidencing the assessment of investment risk, in particular less information on liquidity and no information on hedging
• require less information on covenant, for example no information on corporate cash flows or uses of cash, and only high level information on contingent assets

Bespoke templates will require this information, but, as set out above, we expect the amount and depth of detail provided to depend on the level and complexity of the risk being taken.

For completeness, in our Fast Track consultation we consulted on whether scheme actuaries would confirm the scheme meets the Fast Track parameters. This would not be an endorsement of whether Fast Track is an appropriate approach and should not require professional judgement. The scheme actuary is not being asked to confirm as to whether, in their opinion, the legislation and the principles in the code are being complied with. We will engage with industry further on this as we finalise our Fast Track parameters and regulatory approach.

Differences between pre-relevant and post-relevant date templates

The template for a Bespoke scheme that has passed its relevant date will be based on the template for a Bespoke scheme that has not yet reached the relevant date. Our aim is to make changes only to the extent necessary to reflect the different circumstances of the scheme. A scheme that has passed its relevant date will not have a journey plan and is required to be fully funded on a low dependency funding basis.

We propose that the template for a Bespoke scheme post-relevant date will contain a section setting out:

• the definition of relevant date for a scheme that has reached significant maturity, and how the trustees have determined the scheme’s relevant date
• whether the scheme is compliant with the principle that it must be fully funded on a low dependency funding basis
• the scheme’s maturity and funding level as at the effective date of the actuarial valuation to which the FIS relates
• how the trustees intend the schemes’ funding will progress, as illustrated by any recovery plan, how the discount rates used to calculate the scheme liabilities are expected to change over time, and any differences in the assumptions used to calculate liabilities on a technical provisions basis and on a low dependency funding basis
• reference to whether the current level of risk taken by the scheme trustees in relation to its investment strategy complies with the objective of a low dependency investment allocation, as well as setting out evidence as to why the current level of risk is appropriate
• undiscounted actuarial valuation cashflows

It will not include:

• any information or evidence on how scheme maturity is expected to change over time
• a journey plan or any references to a journey plan, investment journey plan or funding journey plan

Similarly, the template for a Fast Track scheme that has passed the relevant date will be adjusted in the same way to reflect that:

• the scheme has passed its relevant date
• will not have a journey plan, and
• is required to be fully funded on a low dependency funding basis

The template will therefore be very similar to the template for a Bespoke scheme post-relevant date, but will include less information.

Open schemes

We propose that the information trustees of open schemes will provide in the statement of strategy will depend on whether the trustees submit a Fast Track or Bespoke pre-relevant date statement of strategy template.

We have carefully considered what additional information we need from open schemes to assess compliance without increasing trustee burden unnecessarily. We think it is also important trustees have the scope to articulate and demonstrate their scheme specific circumstances in the statement of strategy, which they will be able to do in narrative text boxes and the qualitative trustee questions.

The data we propose to collect from schemes is limited to:

• the number of years of future accrual that have been allowed for when calculating the date of significant maturity
• the estimate of the scheme maturity after allowing for any future benefit accrual
• active member cashflows split between those in respect of past benefit accrual and future benefit accrual
• details of scheme salary increases

Consultation questions on our approach to the statement of strategy

We have aimed to adopt a reasonable and proportionate approach to our application of the FIS regulation to help us collect the data we need to regulate effectively, without unnecessarily increasing trustee burden. The following questions ask you to consider the extent to which you agree with our approach. You should indicate strongly agree, agree, neither agree or disagree, disagree or strongly disagree.

1. To what extent do you agree that our proposal to adjust the information required of smaller schemes as outlined in the document is pragmatic and proportionate? 

Please provide any considerations on particular challenges, the impact these may have, and any proposed alternatives.

2. To what extent do you agree with the two definitions proposed for smaller schemes depending on whether we are requesting actuarial or investment information?

For reference, we propose to use the PPF tiering when it comes to providing investment information for smaller schemes, and the legislative definition of less than 100 members in relation to the actuarial information.

Please provide any considerations on particular challenges, the impact these may have, and any proposed alternatives.

3. To what extent do you agree with our proposal to have pre-defined templates for the statement of strategy to help trustees provide information that is proportionate, relevant and specific to the circumstances of their schemes?

For reference, we propose to have four pre-determined templates rather than giving complete flexibility over how to structure the statement of strategy:

• Fast Track pre relevant date
• Fast Track post relevant date
• Bespoke pre relevant date
• Bespoke post relevant date

Please provide any considerations on particular challenges, the impact these may have, and any proposed alternatives.

4. To what extent do you agree with the benefits we expect to see by providing a pre-determined statement of strategy?

Please provide any further explanation, including whether there are any further benefits we have not identified, or any benefits you disagree with.

5. To what extent do you agree with the key differences in the information we ask for between the four proposed templates?

For reference, the proposed approach is set out in ‘The statement of strategy proposed template’ section.

Please provide any explanation. We are interested in:

• any distinctions you think should be made between the templates
• any challenges or unintended consequences of this approach

6. Are there any scenarios that the proposed four templates are not suitable for?

We are aiming to keep the number of templates to a minimum for simplicity. If you think additional templates would better reflect scheme scenarios or circumstances and better support trustees in their long-term planning and risk management, please outline how the templates would differ.

7. To what extent is the example Bespoke template a clear tool that supports trustees’ long-term planning and risk management and facilitates engagement between trustees, their employer and TPR? 

Please provide any considerations you have, for example how do you envisage using the statement of strategy document once submitted to TPR? Does this approach and the example template support that? How can we make the template more useful for trustees?

8. Do you have any further comments on our general approach to the statement of strategy template?

Please provide any considerations you have on particular challenges, the impact these may have, any unintended consequences and any proposed alternatives you have.

Section 2: About this section

As detailed above, a statement of strategy has two parts to it – the FIS and supplementary matters.

This section of the consultation document gives an overview of the information we propose trustees should provide in both parts. It covers the technical aspects of the data we expect trustees to provide under the new funding regime when it comes in to force.

For each area, we confirm the following:

• which schemes need to provide this information: whether the information is required for all schemes or a particular group of schemes, for example schemes following the Bespoke pathway (as opposed to Fast Track) or schemes that have not yet reached their relevant date
• a summary of the information we propose to collect
• further considerations, including additions or exceptions

Part 1 – Funding and investment strategy (FIS)

Trustees will set out a plan for how the scheme will provide benefits over the long term.

When determining the FIS, the trustees must follow the principle that the scheme must be, as a minimum, in a position of low dependency on the employer by the time it is significantly mature. Trustees must also follow the principle that the amount of funding risk taken over the journey plan must be supported by the employer covenant, and, subject to this, the maturity of the scheme.

Alongside this, trustees will be required to put in place a journey plan setting out how they plan to reach that low dependency position over the period from the effective date of the valuation (the valuation date) to the time they are significantly mature. Trustees must obtain employer agreement to the FIS.

Under the FIS regulations and the Pensions Act 2004, certain information must be included in the FIS. For schemes that have not yet reached their relevant date, this includes the following:

• the funding level, on a low dependency funding basis, and the investments intended at the relevant date
• the funding position, on a low dependency funding basis, as at the effective date of the actuarial valuation to which the FIS relates
• how the trustees expect the funding journey plan to bridge the gap, illustrated by how the discount rates will change over time, and any differences in other key assumptions used to calculate the technical provisions, as against those used to calculate to the low dependency funding basis

For schemes that have already reached significant maturity and are past their relevant date, the information to be provided is more focused on whether the scheme has achieved, and can maintain, low dependency.

Detail on the information we propose to collect for Part 1

Long-term objective

Which schemes need to provide this information?

All schemes.

Summary

Many schemes already have a long-term objective and for those that do not, this will become a requirement. Trustees will need to indicate how they intend the scheme to provide benefits in the long-term by selecting from:

• buy-out
• run-off
• move to a superfund
• move to an alternative consolidator

There will also be an option to insert a narrative explanation of an alternative approach, but we envisage this would not often be used.

Considerations

We do not currently collect this information but doing so will help us better understand individual scheme plans, as well as the overall market.

1. To what extent do you agree that the long-term objective options (buy-out, run-off, move to a superfund or alternative consolidator) capture most long-term objectives for a scheme?

Please provide any other options you think should be included or further information you wish to provide.

Long-term funding strategy

Which schemes need to provide this information?

All schemes.

Summary

Maturity is one of the key components when determining an appropriate level of risk with respect to a scheme’s funding approach. It is an important factor for trustees to consider when setting the FIS.

Trustees will need to provide:

• estimates of the scheme maturity in respect of accrued liabilities as calculated by reference to duration, measured in years at the valuation date
• where a scheme is open to accrual, the estimate of the scheme maturity after allowing for any future benefit accrual considered when calculating the date of significant maturity
• the date when the scheme is expected to reach significant maturity (plus, if applicable, the number of years of future accrual allowed for)
• the relevant date
• the maturity of the scheme at the relevant date by reference to duration measured in years
• the intended funding ratio (as a percentage value) on a low dependency basis that the trustees are (or were) targeting at the relevant date

Considerations

This is new data, and the scheme actuary will need to undertake the duration calculations. In most cases, they will require the scheme cashflows to do so. Further details of the duration calculations are set out in chapter 5 of our draft DB funding code.

Long-term investment strategy

Which schemes need to provide this information?

All schemes.

Summary

Trustees will need to provide information on their intended investment allocation at the relevant date, taking into account the objective that these investments (excluding any surplus) should reflect a low dependency investment allocation (LDIA) as at that date. The high-level allocation information includes splits of expected assets in the three broad categories below.

The percentage of allocation expected in each of these three categories is required.

• Growth: Assets that do not have stable and predictable cashflows (in either nominal or real terms). Examples are equity portfolios, absolute return funds, other hedge funds, most property assets, and many infrastructure assets.
• Matching: These are either cash and money market instruments or assets with fixed or inflation-linked cashflows which have a high degree of certainty. Examples include nominal gilts, index-linked gilts and sterling-denominated investment grade corporate bonds.
• Hybrid: These include a proportion of matching assets and a proportion of growth assets.

Considerations

Trustees should set out the split of growth, matching and hybrid assets. This information will help us understand how trustees intend to comply with the requirements underpinning the LDIA. For a scheme that has passed the relevant date, the trustees must set out what their intended strategic asset allocation was, as at that date.

2. To what extent do you agree that the three broad categories of growth, matching and hybrid assets gives sufficient breakdown of the low dependency investment allocation? 

Please provide any other options you think should be included.

Current funding position

Which schemes need to provide this information?

All schemes.

Summary

Trustees of schemes that have not yet reached the relevant date are required to set out details of their proposed funding journey plan. Trustees of schemes that have passed their relevant date will not have a funding journey plan. However, they will be required to provide information about their funding position.

The starting point in either case is the funding level as at the valuation date. Trustees will need to provide details of this funding level calculated with reference to:

• the low dependency funding basis
• the technical provisions basis
• the buy-out basis

Considerations

We consider that both the low dependency funding basis and the technical provisions basis are relevant to illustrating the funding position and the journey plan. We have also included the buy-out basis to give a more complete picture.

3. To what extent do you agree that it is sensible to include all three funding bases (low dependency funding, technical provisions and buy-out)? 

Please provide your views.

Outline of funding journey plan

Which schemes need to provide this information?

All schemes that have not yet reached their relevant date.

Summary

Trustees will need to set out how they see the scheme’s funding position progress to full funding on a low dependency funding basis at the relevant date.

Considerations

Our draft statement of strategy template sets out standard wording explaining how the current funding position is expected to change over time. This references any recovery plan and sets out differences in key assumptions, such as discount rates, between the technical provisions and low dependency bases and how these are expected to change over time. Our expectation is that most trustees will not need to provide further commentary, as the standard wording in the proposed statement of strategy template will be sufficient.

4. To what extent do you agree that the standard wording in the proposed statement of strategy template is adequate to outline the funding journey plan? 

Detail of funding journey plan

Which schemes need to provide this information?

All schemes have to provide much of the information in this section. Schemes that have passed their relevant date and do not have a journey plan will not need to provide all of it.

Summary

Trustees of schemes that have not yet reached their relevant date will need to detail how they expect to reach full funding on a low dependency basis by that date. In addition to referencing any recovery plan, this will be illustrated by reference to discount rates and other assumptions.

Schemes that have passed their relevant date will not have a funding journey plan. However, they will still be required to provide information about whether the current funding strategy will be improved or maintained.

Discount rates: methodology

Which schemes need to provide this information?

All schemes.

Summary

Trustees will need to select one of the below discount rate methodologies adopted for the calculation of the technical provisions:

• horizon method – this would also capture linear de-risking strategies or stepped de-risking strategies (See the ‘Addition or premiums to the yield curve/single yield’ section)
• different rates pre-retirement and post-retirement
• constant addition
• other

Considerations

Some approaches will automatically converge with low dependency, for example ‘horizon method’, whereas other approaches will require further narrative or consideration of the assumptions adopted to explain how this is expected to be achieved. Where ‘other’ is selected, further explanation of the approach taken would need to be added.

5. To what extent do you agree that the discount rate approach options (horizon method, different rates pre-retirement and post-retirement, constant addition) include the majority of options available?

Please provide a rationale for your response, including any other options you think should be included.

Discount rates: detail

Which schemes need to provide this information?

All schemes.

Summary

Here we ask trustees to provide information on the discount rates used to calculate the scheme’s technical provisions and the low dependency liabilities. We propose this information is separated between that of the underlying curve/yield and the additional premium. We are asking most trustees to provide us with the forward rates over the next 100 years. However, the precise information to be provided is dependent on the discount rate methodology adopted and further details are provided in the following sections.

Considerations

We understand that some schemes do not use a curve approach so the option to provide a single equivalent rate is also available.

Underlying yield curve/Single yield information

Which schemes need to provide this information?

All schemes.

Summary

Trustees will need to select which underlying curve or single yield has been used. We are asking most trustees to provide details of the one year forward rates for the chosen curve for the next 100 years, subject to some exceptions.

The selections are:

• gilts
• swaps
• inflation
• other approach

Considerations

We do not expect the use of an inflation curve to be one of the main approaches trustees take when setting the discounting assumptions for the low dependency funding basis. Where this option is used, trustees may face difficulty in planning for and demonstrating convergence of the technical provisions on that basis.

Schemes that do not normally use a yield curve approach can decide to provide the single yield in the FIS. However, we will ask larger schemes that choose to adopt this approach in the FIS to provide a yield curve as part of the supplementary matters.

6. To what extent do you agree that the selections of gilts, swaps, inflation or other cover the main underlying yield curves used when setting technical provisions and low dependency funding basis? 

Addition or premiums to the yield curve/single yield

Which schemes need to provide this information?

All schemes.

Summary

The addition or premium that is applied to the yield curve/single yield is provided separately. When combined with the yield curve, these will be equivalent to the total forward discount rates that are used in the calculation of the technical provisions and the low dependency liabilities. The approach for the data we collect will depend on the discount rate methodology approach.

However, if larger schemes choose not to adopt the yield curve approach in their FIS, we will still ask them to provide details of the forward rates consistent with the single yield for the next 100 years and the addition of premium applied to the yield curve (forward rates) at each term over the next 100 years for technical provisions and low dependency discount rates as part of the supplementary matters.

Yield curve approach – horizon, constant addition, or some other discount rate structure

• The addition or premium applied to the yield curve at each term over the next 100 years for both technical provisions and low dependency discount rates.
• Trustees that use either constant addition or some other discount rate methodology for their schemes will need to explain how they expect the technical provisions basis to converge with the low dependency funding basis over time.

Yield curve approach with different rates pre-retirement and post-retirement

• The addition or premium applied to the yield curve for:
  • pre-retirement
  • post-retirement for non-pensioners
  • current pensioners
  • low dependency

Schemes that do not use a curve

• We understand that not all schemes use a curve. In this scenario, trustees may provide a single yield. The form of that data will depend on the discount rate methodology.

Information needed for horizon method

• The addition or premium applied to the yield curve for:
  • the initial horizon period
  • the post-horizon period
• The date the horizon approach will apply until.
• The addition or premium applied to the yield curve for low dependency.
• If applicable, a description of how the trustees expect the technical provisions basis to converge with the low dependency funding basis by the relevant date.

Information needed for different rates pre-retirement and post-retirement

• The addition or premium applied to the single yield for:
  • pre-retirement
  • post-retirement for non-pensioners
  • current pensioners
  • low dependency
• A description of how the trustees expect the technical provisions basis to converge with the low dependency funding basis by the relevant date.

Information needed for constant addition

• The addition or premium applied for:
  • technical provisions
  • low dependency
• A description of how the trustees expect the technical provisions basis to converge with the low dependency funding basis over time.

Information needed for alternative or custom approaches

As there are a variety of approaches that could be applied, we ask that further calculations are made to determine the single equivalent discount rates consistent with the liabilities, calculated on both a technical provisions basis and low dependency basis.

In these circumstances, we will ask for:

• the overall single equivalent discount rate consistent with the technical provisions
• the overall single equivalent discount rate consistent with the low dependency liabilities
• the additional yield, calculated as the difference between the single equivalent discount rate and the spot yield of the underlying curve on a technical provisions basis
• the additional yield, calculated as the difference between the single equivalent discount rate and the spot yield of the underlying curve on a low dependency basis
• a description of how the trustees expect the technical provisions basis to converge with the low dependency funding basis over time

Considerations

Trustees of schemes that have not yet reached the relevant date will need to explain their funding journey plan and how they expect to reach full funding on a low dependency basis by the time they reach that date. This can be illustrated by the discount rates used to determine both the technical provisions and low dependency liabilities. By the time of the relevant date, the discount rates for technical provisions should be equivalent to, or more prudent than, the discount rates for low dependency. The above data provides the evidence that this is the case. For schemes that have passed the relevant date, it demonstrates that this position has been reached and is being maintained.

7. In respect of the underlying yield curves, indicate the extent to which you agree with the approach proposed of providing the forward discount rate curve, or for small schemes the appropriate single rate?

Please summarise anything further that you think we should consider.

8. In respect of the addition/premium to the yield curve, indicate the extent to which you agree with the approach proposed to provide the forward discount rates? 

Please summarise anything further that you think we should consider.

9. In respect to the addition/premium to the yield curve for schemes that use a pre- and post-retirement discount rate methodology, indicate the extent to which you agree with the approach proposed of providing the appropriate single rate?

Please summarise anything further that you think we should consider.

Other key assumptions

We will also be asking for details of:

• other financial information
• demographic information
• comparisons between assumptions in respect of the technical provisions and low dependency funding basis

Other financial information

Which schemes need to provide this information?

All schemes.

Summary

Other financial information required from all schemes for their technical provisions includes:

• RPI inflation
• CPI inflation
• pay increases (where applicable)

Like the information regarding discount rates, we are asking most trustees to provide the forward rates of the above assumptions for the next 100 years.

Considerations

• Inflation: schemes that only provide benefit indexation in line with one form of inflation index (RPI or CPI) can provide the same inflation curve for both.
• Pay increases: where schemes also apply a promotional scale, we are asking that this data is included as a broad estimation of the ‘average’ pay increase that would be applied within the pay increase assumption.
• Schemes that do not use a curve approach should provide the single equivalent rate. However, if trustees of larger schemes choose this option, they will be asked to provide the forward rates of the above assumptions for the next 100 years as part of the supplementary matters.

10. To what extent do you agree with the proposed approach to capture information on inflation and pay increase data?

Please summarise anything further that you think we should take in to consideration.

Demographic information

Which schemes need to provide this information?

All schemes.

Summary

For key demographic assumptions, the following information will be required:

• a summary of the mortality assumptions
• a summary of the commutation assumptions

Given the increased sophistication in mortality approaches over the last decade, we will no longer ask for the naming convention of the mortality tables adopted. This is because the life expectancy information is more useful to us.

Information regarding commutation assumptions is new and, as there are a variety of methods that are applied for commutation, we ask for the percentage of the pension commuted based on:

• the HMRC maximum tax-free cash sum formula, or
• the percentage of pension entitlement

Given the variety of commutation factors that might be applied in the valuation and approaches used, rather than asking for details about the factors at various ages, we are instead asking for the impact (increase) in the value of the technical provisions if no allowance for commutation was made.

Considerations

This information, when combined with the discount rate information, forms the key assumptions that determine the overall level of prudence within the funding approach adopted. We need to look at the overall funding basis when considering the overall level of prudence adopted, and how this fits with the funding journey plan and/or the assumptions used for the low dependency funding basis on or after the relevant date. This will enable us to undertake more targeted interventions.

We consider the data on demographic assumptions as either readily available or similar to data currently required. This data should already be embedded into the valuation process.

11. To what extent do you agree that it would be useful to provide further information on the mortality tables adopted for the mortality assumptions?

Please set out what further information you think it would be useful for you to provide and the reasons why.

12. On allowances for commutation, to what extent do you agree that the options provided capture the majority of approaches used?

Please set out any additional options that you think should be included, and state why.

Comparison between assumptions for technical provisions and low dependency funding basis

Which schemes need to provide this information?

All schemes that have not yet reached their relevant date.

Summary

The funding journey plan of a scheme that has not yet reached its relevant date is illustrated not only by discount rates, but also by any differences between the other key assumptions used to calculate the technical provisions, and those used to calculate the low dependency funding basis at the relevant date. We will therefore ask for confirmation from the trustees that the assumptions underlying the technical provisions and the assumptions used to calculate low dependency at the relevant date are the same. There will be an option to enter an explanation if there are differences.

Considerations

Trustees need to set out how schemes will reach their low dependency target, so it’s necessary to understand how the demographic assumptions being used to calculate the technical provisions differ from those that will be used to calculate the low dependency funding basis at the relevant date. We will expect them to detail any differences.

13. To what extent do you agree with the proposed approach of asking about how the key assumptions differ between the technical provisions and low dependency liabilities?

If you do not agree with the proposed approach, please set out any alternative approach you think we should consider.

14. Do you have any further views or considerations on the information required for Part 1 of the statement of strategy, including any views on alternative approaches or missing data to support Part 1?

Part 2 – Supplementary matters

Trustees must use Part 2 of the statement of strategy to articulate and demonstrate supplementary matters, including how risks are being managed. Part 2 includes:

• the trustees’ assessment of how successfully the FIS is being implemented, and related risks
• actuarial information, including a summary of the actuarial valuation
• investment information relating to the current investment strategy
• the trustees’ assessment of the employer covenant, and the evidence on which it is based

Trustees must consult with the employer when preparing or revising Part 2 of the statement of strategy.

Some narrative information will be required in Part 2. However, much of it is information trustees are currently required to provide, or that we anticipate trustees of a well-run scheme will have easily available.

The FIS regulations that were laid in Parliament in January 2024 provide us with the discretion to ask for different levels of detail from different schemes in Part 2 of the statement of strategy.

Trustee assessment

Which schemes need to provide this information?

All schemes – but one requirement will not apply to schemes following the Fast Track pathway.

Summary

We intend to collect information from trustees of schemes following the Bespoke pathway on:

• the extent to which the FIS is considered appropriate
• implementation of the FIS – including the main risks faced in implementing it

However, we will only ask schemes following the Fast Track pathway about implementation of the FIS, not about how far they consider it appropriate.

This is new information that trustees have not previously had to provide but much of it is required under the Pensions Act 2004.

The expectation is that the approach will encourage trustees to incorporate integrated risk identification and management processes into their deliberations.

The template includes examples to illustrate how trustees may approach these questions. We would expect the detail provided by trustees to reflect the level and complexity of the risk being taken. As Fast Track reflects our view of tolerated risk and acts as a regulatory filter for our assessment of valuation submissions, we anticipate less detail will be provided. We would expect greater detail from Bespoke schemes, but this detail will be focused on:

• whether the funding risk is supportable by the employer covenant and in line with the maturity of the scheme
• whether the recovery plan is appropriate, including whether it meets the ‘reasonably affordable’ principle
• whether the long-term strategy is appropriate and in line with the legislation

Once the code has been finalised, we will engage with the industry on what we would expect trustees to include in these answers. This guidance will be published alongside the final statement of strategy templates.

Extent to which the FIS is considered appropriate

This is where trustees and scheme managers following the Bespoke pathway must explain whether the FIS is, or remains, appropriate. Trustees will need to show they have considered this matter carefully and detail their conclusion and their reasons.

Implementation of the FIS

Trustees of all schemes must give their opinion as to the extent to which the FIS is being successfully implemented.

Where the FIS is not being successfully implemented, trustees should detail the steps they are taking to remedy the position and the timing to do so.

Main risks and significant decisions

Trustees of all schemes are required to set out the main risks faced by the scheme in implementing the FIS, and how they intend to mitigate or manage them. They must also set out reflections on any significant past decisions that are relevant to the FIS, including any lessons learned.

Actuarial information

All schemes will need to provide a summary of their valuation, and of their recovery plan if they have one. Schemes that have not reached their relevant date will also need to explain how scheme maturity is expected to change over time.

Estimate of scheme maturity and evidence for how it will change

Which schemes need to provide this information?

All schemes. However, only schemes that have not reached the relevant date will need to provide evidence of how it will change over time.

Summary

Trustees are required to evidence how the scheme maturity will change over time.

We believe that, in most cases, providing scheme benefit cashflows over the next 100 years is likely to provide clear evidence for how maturity is expected to change over time. We are therefore asking for the benefit cashflow information, and these cashflows should be based on the assumptions underlying the low dependency basis, but not discounted. This will evidence the duration figures provided in the FIS and can be used to see how durations will change over time as the scheme approaches significant maturity.

The cashflows are split out as follows.

• Active members’ future service cashflows – we expect these to be the cashflows that would arise from future accrual from current and future members where appropriate. These are for the period that is being allowed for when calculating the date of significant maturity.
• Active members’ past service cashflows – this refers to cashflows for the accrued benefits for the current active members only.
• Deferred (or preserved) member cashflows.
• Pensioner and dependant member cashflows.
• Insured member cashflows.

Where a scheme is open to future accrual, we are also asking for the number of years of future accrual that have been allowed for when calculating the date of significant maturity.

For small schemes, where cashflows are not reasonably available or not able to be produced (for example, because it is cost-prohibitive to do so), we will rely on the scheme actuary’s calculations of durations over time as documented in the FIS, as the evidence for how the scheme’s maturity will change over time. We may, however, reach out to trustees for further explanation on a scheme-by-scheme basis as we carry out our risk assessment process for schemes that we choose to engage with further.

Considerations

We believe that the requested information is a reasonable approach to showing how maturity is expected to change over time. Where schemes are providing cashflow data, this will also improve our understanding and modelling of those schemes and the wider DB landscape. It will improve our understanding of maturity, evolution and likely liquidity needs over time – and enable us to target our interventions effectively.

We understand that most valuation systems can automatically provide cashflows and that many consultancies already include benefit cashflow charts in their valuation reports. Additionally, we believe that the revised regulations and DB code will make it more likely that benefit cashflows are regularly used and provided to scheme managers. We do, however, recognise there may be practical considerations for some schemes and some advisory consultancies, so we have sought to adopt a proportionate approach to the data requirement.

1. To what extent do you agree that it is reasonably straightforward to provide the cashflows information listed?

2. Is it easier to provide benefit cashflows on a low dependency basis or on a technical provisions basis?

3. To what extent do you agree that you would expect these cashflows to be materially different?

4. To what extent do you agree that splitting the cashflows into the five categories listed is a reasonable approach?

Please tell us about any considerations that you think we should take into account.

5. Please provide any further considerations that you have on the actuarial data to be included in Part 2 of the statement of strategy. Please include any views on:

• alternative approaches or missing data that you have considered
• any data items that you think could be included or excluded from Fast Track

Summary of actuarial valuation results

Which schemes need to provide this information?

All schemes.

Summary

Currently, we ask for summarised valuation information as part of a recovery plan submission and in the scheme return. We intend to ask for similar information in the statement of strategy to that currently requested as part of recovery plan submissions, with the main changes being:

• separation of insured liabilities from non-insured liabilities
• confirmation of the resulting funding level
• inclusion of the low dependency valuation information
• removal of summary of PPF section 179 (s179)
• removal of the accounting valuation information

We will also ask for the proportion of liabilities on a low dependency funding basis at the valuation date which are sensitive to inflation. This is ideally equivalent to the inflation liability proportion that would be applied in the Fast Track stress test if the scheme adopted a Fast Track approach. We need this information to understand the scheme’s funding position in more detail and the sensitivity of this to market changes.

Finally, with the exception of small schemes, we will also ask for details of discount rates and other assumptions over the next 100 years, where this information has not already been provided in the FIS, for the reasons previously set out.

Considerations

We believe this information is readily available following a valuation, and (with the exception of the detailed information on discount rates and other assumptions, which we have referenced previously) most of it is already provided to us in the current valuation submission and scheme return.

We appreciate that the proportion of liabilities on a low dependency funding basis which are sensitive to inflation will not be included in valuation reports currently. However, we anticipate that such sensitivities can easily be included once valuation reports are required to include low dependency funding. We also expect these can be easily calculated.

6. To what extent do you agree with the removal of the requirement to provide accounting valuation and s179 valuation data from a valuation submission perspective? Details of the s179 valuation will still need to be provided via the scheme return.

Please summarise your reasons if you do not agree with our removal of the requirement to provide accounting and s179 valuations data as part of the valuation submission process.

Summary of recovery plan

Which schemes need to provide this information?

All schemes that require a recovery plan.

Summary

We need to know how any deficit at a valuation date will be recovered, as this forms part of the overall risks managed by the trustees. It is part of the funding journey plan for a scheme that has not yet reached the relevant date. Where a scheme has passed the relevant date, it will demonstrate how the trustees intend to remedy any failure to maintain full funding on a low dependency funding basis on or after that date.

We will ask for:

• the date at which the schedule of contributions was certified by the scheme actuary
• the date when the recovery plan commenced:
  • for Fast Track valuations, this will normally be the valuation date
  • for Bespoke valuations, this could be a different date
• the date when the recovery plan will end
• the estimated technical provisions deficit at the valuation date
• the monetary value of any assumed future investment outperformance allowed
• whether any post valuation experience is allowed for, and if it is:
  • the monetary value of post-valuation experience allowed for in the period between the valuation date and the recovery plan certification
  • the assumed deficit at the date the recovery plan is certified
• the annual deficit recovery payments over the term of the plan – split out for the first twenty years and the total thereafter

Considerations

Providing information around the assumed investment outperformance and the allowance for post valuation experience is a new requirement. We believe this data should be readily available. We ask for monetary amounts, rather than percentages, to reduce any ambiguity. It also means we can see how the valuation deficit is to be recovered.

Schemes that take a Fast Track approach will make zero allowance for future assumed asset outperformance.

1. To provide details about post valuation experience, we expect providing an updated estimated deficit would be best. To what extent do you agree that providing an estimated deficit is the appropriate approach?

Please provide any further explanation.

2. If providing an updated deficit, to what extent do you agree it would be straightforward to also provide the updated estimates for assets and liabilities, if we require that detail?

Please provide any further explanation.

3. Share your views on our proposed approach to collecting information on investment outperformance and post-valuation experience, including any alternative questions that should be considered.

Investment information

All schemes are required to provide certain information in relation to their notional strategic investments.

Investment strategy

Which schemes need to provide this information?

All schemes. However, some information will only be required from schemes following a Bespoke pathway, and the information will also differ depending on whether a scheme has reached the relevant date.

Summary

We focus on the scheme’s investment strategy, as it helps us to assess risks to the scheme’s funding. Some of the information required is about the liquidity of the scheme’s investment strategy, including:

• the current strategic asset allocation as percentage allocations to different asset classes – with supplementary information on target interest rate, inflation and currency hedge ratios
• the risk and expected return of the current strategy
• information about the trustees’ consideration of liquidity in setting the investment strategy

Considerations

For schemes that have yet to reach their relevant date, we will also ask for information on:

• the expected strategy at the relevant date
• how the strategy is expected to evolve between the date of the last completed actuarial valuation and the relevant date

Current level of investment risk

Which schemes need to provide this information?

All schemes. However, some additional information is required from schemes following a Bespoke pathway, or which have passed the relevant date.

Summary

Trustees will be required to provide information on the level of risk in their investment strategy as at the valuation date. Additional information is required on the method of calculating the current level of investment risk from schemes on a Bespoke pathway.

We expect that level of risk to be expressed as a pound value using one of the methods below. It should be calculated based on the scheme’s strategic asset allocation applied to the total scheme assets.

The methods are as follows:

1. Stress test based on PPF stress factors
   • Schemes on a Fast Track pathway will only be required to provide the pound value for the investment risk, as it will need to have been calculated according to the Fast Track stress test parameters.
2. Value at Risk (VaR) calculation
   • The type of stress test (asset only or asset and liability stress).
   • The liability basis.
   • Percentile.
   • Period over which the VaR is calculated.
3. Conditional VaR (CVaR) calculation
   • The type of stress test (asset only or asset and liability stress).
   • The liability basis.
   • Percentile.
   • Period over which the CVaR is calculated.
4. An alternative method: Trustees will be expected to state the approach used, including:
   • method
   • probability associated with downside risk (if applicable)
   • timescale applied (if applicable)

For schemes post-relevant date, trustees will also be required to provide information on whether their strategic asset allocation complies with the objective that assets of at least the value of the scheme liabilities (calculated on a low dependency funding basis) are invested in accordance with a low dependency investment allocation.

Considerations

We expect trustees to be able to articulate the current level of risk associated with their notional investment strategy. It is fundamental to the assessment of risk implicit in the scheme’s funding approach.

Schemes on the Bespoke pathway may provide other information on investment risk, dependent on the stress test applied. We anticipate that trustees will have considered one or more of these measures when undertaking the analysis which has informed their decision in agreeing the investment strategy.

We will use the information to assess whether the risk in the funding and investment strategy is supportable.

Current strategic asset allocation

Which schemes need to provide this information?

All schemes.

Summary

Trustees are required to provide a breakdown of their investment strategy by different asset classes. We require information on the current strategic investment allocation as at the valuation date and as set out in the existing scheme return categories (Tier 1, Tier 2 or 3). Schemes that are in Tier 1 can opt to provide a Tier 2 or 3 level of detail if they wish.

We will also require, on a best estimate basis, the expected long-term return from the strategic asset allocation.

Considerations

We propose using the same tier structure as the existing scheme return to support consistency in our approach. It also provides small schemes with the option to provide a less detailed breakdown.

Hedging

Which schemes need to provide this information?

Schemes following a Bespoke pathway.

Summary

For schemes on a Bespoke pathway, trustees are also required to provide:

• a high-level summary of their approach to hedging interest rates, inflation and foreign currency exposure
• for schemes that have set target ratios:
  • information on the target ratios and application to assets or liabilities and 
  • for target ratios on liabilities, the definition of liabilities
  • target hedge ratios on overseas exposure, separated by developed and emerging markets

Considerations

We will use the information when assessing whether the risk in the strategic investment strategy is supportable.

Liquidity

Which schemes need to provide this information?

Schemes following a Bespoke pathway.

Summary

For schemes on a Bespoke pathway, trustees are also required to provide the following information on liquidity in their strategic investment strategy:

• proportion of investment in highly liquid assets
• proportion of investment in illiquid assets
• narrative on factors taken into account in assessing adequacy of liquidity in strategic allocation

Considerations

We will use the information when assessing whether the risk in the strategic investment strategy is supportable.

Which schemes need to provide this information?

Schemes following a Fast Track pathway.

Schemes should attest that they have satisfied themselves that sufficient liquid assets are available. Schemes should also provide a statement to say on what grounds they have assessed their strategy as suitably liquid.

Level of investment risk in the journey plan: risk at relevant date

Which schemes need to provide this information?

Schemes on a Bespoke pathway that have not yet reached their relevant date.

Summary

Trustees will need to provide information about the expected investment risk at the relevant date. The risk at the relevant date is to be expressed as a percentage drop in funding level.

The questions we ask about the method of determining the investment risk at the relevant date will be similar to questions we ask in relation to the investment risk at the valuation date.

The investment risk at the relevant date should reflect the objective of a low dependency investment strategy on and after that date.

Level of investment risk in the journey plan: de-risking strategy

Which schemes need to provide this information?

Schemes on a Bespoke pathway that have not yet reached their relevant date.

Summary

Trustees will need to provide information about how they intend to achieve the objective of a low dependency investment allocation (for assets other than surplus) by that date. Trustees will need to summarise their approach to de-risking between now and the relevant date, for example by using time-based or funding-based triggers, or some other approach. We will also ask for an explanation of how this approach is expected to achieve a low dependency investment allocation (excluding surplus) by the relevant date.

Considerations

Schemes on a Fast Track pathway are expected to have a level of investment risk within the Fast Track level of tolerated risk and will not, therefore, need to provide this information.

1. We do not envisage schemes will incur significantly more costs in providing journey plan investment risk data. To what extent do you agree with this assessment?

If you strongly disagree it would be helpful to our understanding if you could provide a rough indication what additional set-up and, separately, annual running costs might be.

Covenant information

Covenant support is recognised in the draft FIS regulations as an underpin to supportable risk. This is the first time we will be asking trustees to provide covenant information when submitting their valuations. Most of this information should already be available as we would expect it to form part of the trustees’ assessment of covenant support.

Currently, trustees typically rate covenant support on a scale of 1 (strong) to 4 (weak) in the scheme return. Trustees will now need to provide more detailed information on the elements of covenant support, depending on how much reliance is placed on the covenant to support the level of risk implied by the funding and investment strategy over the reliability period.

We expect trustees or their advisers to provide this information based on what is provided to them by employers or other entities with a legal obligation to the scheme, as well as what is available in the public domain. For some multi-employer schemes, it may be appropriate to submit aggregated covenant information for more than one employer. We believe aggregated covenant information should cover employers, accounting for at least 80% of scheme liabilities.

For a small number of industry-wide non-associated multi-employer schemes (NAMES) that are non-segregated, we expect trustees to submit a written explanation of their approach to assessing covenant strength and calculating the Maximum Risk Test as a narrative text box or in a pdf document.

Our draft revised DB funding code provides expectations on how trustees should assess the employer covenant and sets out our interpretation of how to comply with the relevant legislative requirements. Further guidance on all aspects of the covenant information we are requesting will be published in our forthcoming covenant guidance.

1. To what extent do you agree that the proposed approach to submitting covenant information will work in practice for different types of multi-employer schemes?

If you disagree, what alternative approaches do you suggest?

2. To what extent do you agree with the proposal that aggregated covenant information should cover employers that account for at least 80% of scheme liabilities?

If you disagree, what alternative approaches do you suggest?

Assessing the employer covenant

Which schemes need to provide this information?

All schemes.

Summary

We are asking trustees to confirm they have assessed the strength of the employer covenant with reference to:

• the maximum affordable contributions (after deficit recovery contributions) over the reliability period and any contingent assets
• whether or not the employer covenant is sufficient to support the level of risk implied by the funding and investment strategy over the reliability period, taking into account the principles around the appropriate level of risk set out in our DB funding code and related guidance

We will use this information to assess compliance with the FIS regulations and whether the employer covenant can support the level of risk implied by the funding and investment strategy over the reliability period.

For Bespoke valuations, we are also asking for:

• further details about contingent assets on which reliance is placed, and
• a document summarising how they have assessed maximum affordable contributions, which we would expect to include the assumed figures in each year of the reliability period, as well as the underlying assumptions made

We have included an example summary of an assessment of maximum affordable contributions with our completed example statement of strategy for illustration purposes.

3. We expect employers to work with trustees and provide the appropriate information. To what extent do you agree that information required will be obtainable to understand the level of risk supportable by the covenant?

If you disagree, please outline what the challenges might be and where they may come from and provide your considerations on how they may be addressed.

Employers

Which schemes need to provide this information?

All schemes.

Summary

Information on scheme employers (and their respective obligations to their scheme) is already submitted to us as part of the scheme return. We are asking trustees to confirm whether their covenant assessment is also based (partly or entirely) on any other entity (such as a guarantor) the scheme has legal recourse to.

Considerations

Where covenant assessment is also based on any other entity the scheme has legal recourse to, trustees will be asked to confirm which entity and provide a brief explanation why.

We are asking for this information to help us identify the entities that trustees place reliance on when assessing covenant support.

Employer cashflows

Which schemes need to provide this information?

Bespoke pathway only.

Summary

Trustees will be required to provide free cashflow information for the year prior to the effective date of the valuation and the current and next year forecasts.

We will ask schemes to provide their employers’:

• prior year actual free cashflows (FCF) or FCF proxy
• current year forecast FCF or FCF proxy
• year 1 forecast FCF or FCF proxy

Proxies for FCF may be submitted where cashflow information is not available, and it is disproportionate to produce the information. Proxies that can be used include adjusted versions of cashflows/profit before tax/ EBITDA.

Employer liquidity

Which schemes need to provide this information?

Bespoke pathway only.

Summary

We are requesting current balance sheet liquid assets, after allowing for reasonable adjustments for working capital requirements.

Considerations

This will enable us to assess the employer’s affordability to make contributions to the scheme, and the appropriateness of the recovery plan.

Trustees will be asked to provide their employers' current balance sheet liquidity position.

Reasonable alternative uses of cash

Which schemes need to provide this information?

Bespoke pathway only.

Summary

Where the recovery plan is greater than the reliability period, or longer than six years (the reliability period we believe applies to most employers), we will require information about the employer’s reasonable alternative uses of cash.

We will also ask for the following information on reasonable alternative uses of cash:

• investment in sustainable growth
  • prior year actual
  • current year forecast
  • Year 1 forecast
• shareholder returns
  • prior year actual
  • current year forecast
  • Year 1 forecast
• payments to other DB schemes
  • prior year actual
  • current year forecast
  • Year 1 forecast
• other alternative uses of cash not covered above
  • prior year actual
  • current year forecast
  • Year 1 forecast

We will also provide the option to provide additional explanation on the reasonable alternative uses of cash detailed above.

This information will help us assess the level of contributions the employer can reasonably afford and whether the scheme is being treated fairly.

Contingent assets

Which schemes need to provide this information?

All schemes where there is reliance on a contingent asset. However, schemes following a Bespoke pathway will be asked to provide much more detail.

Summary

Trustees of all schemes will be required to confirm whether they are placing reliance on contingent assets, and if so, the type of contingent assets, value ascribed and how they rely on it (eg to enable them to take additional funding and investment risk above what the employer can support prior to reaching significant maturity).

Where reliance is placed on a contingent asset, we will also ask trustees of schemes following a Bespoke pathway to provide details of:

• the period covered/maturity date
• any value cap
• any triggers attached to accessing value from the contingent asset
• whether it can fall away other than at expiry/maturity
• amount of the contingent asset value being relied upon for each purpose (eg the amount supporting additional funding risk, as opposed to the amount supporting an extended recovery plan)

Where the contingent asset is a guarantee, we will also ask for:

• the name and company number/charity number of the guarantor, and whether it is an associated company
• whether it is a formal look-through guarantee, and if so, whether it is subject to some form of limitation (for example, in quantum or duration)

This will help our understanding of the contingent asset’s ability to underpin scheme risk.

Where the contingent asset is supporting asset backed contributions, we will also ask for a schedule of payments.

Covenant reliability and longevity

Which schemes need to provide this information?

All schemes.

Summary

Trustees will need to confirm their view on the reliability and longevity periods. These time periods are essential in understanding the ability of the covenant to support the level of risk implied by the funding and investment strategy and the journey plan of valuation submissions.

• Reliability period: The period where trustees have reasonable certainty over the employer’s available cash to fund the scheme. For most employers, we expect the reliability period to be up to a period of six years. However, it may be shorter or longer depending on several factors such as the industry it operates in and security of income and expenditure. Further detail will be provided in our forthcoming covenant guidance.
• Longevity period: The maximum period in which trustees can be reasonably certain that the employer will remain in existence to support the scheme. This information will help us understand the reasonableness of the journey plan.

We expect trustees to report both these periods in years.

Considerations

We are mindful of proportionality when assessing the reliability period.

Where a shorter reliability period is:

• reflected in both the scheme’s technical provisions and length of the recovery plan, and
• sufficient to support the risk being taken by the scheme

trustees may provide the reliability period in terms of ‘at least X years’ where it is more proportionate rather than undertake a detailed assessment to identify a longer reliability period.

As long-term forecasting is inherently more unpredictable and subjective, trustees may report the longevity period in terms of ‘at least X years’ where it is more proportionate.

4. To what extent do you agree that the covenant information we propose to request for Bespoke and Fast Track valuation submissions is reasonable and proportionate?

Please detail any different approach you think we should consider to any of the covenant areas discussed.

Appendix: list of all consultation questions

Notes

1. For questions that ask to what extent you agree, you should indicate strongly agree, agree, neither agree or disagree, disagree or strongly disagree.
2. The easiest way for us to deal with responses is if you complete the online survey.

Our approach to the statement of strategy

1. To what extent do you agree that our proposal to adjust the information required of smaller schemes as outlined in the document is pragmatic and proportionate?
2. To what extent do you agree with the two definitions proposed for smaller schemes depending on whether we are requesting actuarial or investment information?
3. To what extent do you agree with our proposal to have pre-defined templates for the statement of strategy to help trustees provide information that is proportionate, relevant and specific to the circumstances of their schemes? 
4. To what extent do you agree with the benefits we expect to see by providing a pre-determined statement of strategy?
5. To what extent do you agree with the key differences in the information we ask for between the four proposed templates?
6. Are there any scenarios that the proposed four templates are not suitable for?
7. To what extent is the example Bespoke template a clear tool that supports trustees’ long-term planning and risk management and facilitates engagement between trustees, their employer and TPR?
8. Do you have any further comments on our general approach to the statement of strategy template?

Part 1: funding and investment strategy

1. To what extent do you agree that the long-term objective options (buy-out, run-off, move to a superfund or alternative consolidator) capture most long-term objectives for a scheme?
2. To what extent do you agree that the three broad categories of growth, matching and hybrid assets gives sufficient breakdown of the low dependency investment allocation?
3. To what extent do you agree that it is sensible to include all three funding bases (low dependency funding, technical provisions and buy-out)?
4. To what extent do you agree that the standard wording in the proposed statement of strategy template is adequate to outline the funding journey plan?
5. To what extent do you agree that the discount rate approach options (horizon method, different rates pre-retirement and post-retirement, constant addition) include the majority of options available?
6. To what extent do you agree that the selections of gilts, swaps, inflation or other cover the main underlying yield curves used when setting technical provisions and low dependency funding basis?
7. In respect of the underlying yield curves, indicate the extent to which you agree with the approach proposed of providing the forward discount rate curve, or for small schemes the appropriate single rate?
8. In respect of the addition/premium to the yield curve, indicate the extent to which you agree with the approach proposed to provide the forward discount rates?
9. In respect to the addition/premium to the yield curve for schemes that use a pre- and post-retirement discount rate methodology, indicate the extent to which you agree with the approach proposed of providing the appropriate single rate?
10. To what extent do you agree with the proposed approach to capture information on inflation and pay increase data?
11. To what extent do you agree that it would be useful to provide further information on the mortality tables adopted for the mortality assumptions?
12. On allowances for commutation, to what extent do you agree that the options provided capture the majority of approaches used?
13. To what extent do you agree with the proposed approach of asking about how the key assumptions differ between the technical provisions and low dependency liabilities?
14. Do you have any further views or considerations on the information required for Part 1 of the statement of strategy, including any views on alternative approaches or missing data to support Part 1?

Part 2: actuarial information

1. To what extent do you agree that it is reasonably straightforward to provide the cashflows information listed?
2. Is it easier to provide benefit cashflows on a low dependency basis or on a technical provisions basis?
3. To what extent do you agree that you would expect these cashflows to be materially different?
4. To what extent do you agree that splitting the cashflows into the five categories listed above is a reasonable approach?
5. Please provide any further considerations that you have on the actuarial data to be included in part 2 of the statement of strategy.
6. To what extent do you agree with the removal of the requirement to provide accounting valuation and s179 valuation data from a valuation submission perspective?

Part 2: recovery plan

1. To provide details about post valuation experience, we expect providing an updated estimated deficit would be best. To what extent do you agree that providing an estimated deficit is the appropriate approach?
2. If providing an updated deficit, to what extent do you agree it would be straightforward to also provide the updated estimates for assets and liabilities, if we require that detail?
3. Share your views on our proposed approach to collecting information on investment outperformance and post-valuation experience, including any alternative questions that should be considered.

Part 2: investment information

1. We do not envisage schemes will incur significantly more costs in providing journey plan investment risk data. To what extent do you agree with this assessment?

Part 2: covenant information

1. To what extent do you agree that the proposed approach to submitting covenant information will work in practice for different types of multi-employer schemes?
2. To what extent do you agree with the proposal that aggregated covenant information should cover employers that account for at least 80% of scheme liabilities?
3. We expect employers to work with trustees and provide the appropriate information. To what extent do you agree that information required will be obtainable to understand the level of risk supportable by the covenant?
4. To what extent do you agree that the covenant information we propose to request for Bespoke and Fast Track valuation submissions is reasonable and proportionate?

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