As of Sunday 22 September 2024, the new era of funding requirements for defined benefit pension schemes has begun.  Schemes with valuations on and from this date will be the first to put the new requirements of the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 (the “FIS Regulations”, enacted in April) into practice. 

As we’ve reported previously, the FIS Regulations themselves are only one part of the new regime, which will be supported by an updated Code of Practice from the Pensions Regulator ("TPR") and guidance from TPR on its “twin track” regulatory approach. Schemes are also now required to submit a statement of strategy to TPR and to formally assess the underlying employer covenant.  We look at how close to being finalised the form / guidance for each of these remaining strands is, when we can expect further developments and how TPR expects schemes to approach their valuations in the intervening period.

Code of Practice

As we reported over the summer, having been delayed because of the general election, TPR’s Code of Practice was laid at the end of July.  It is legally required to lay before Parliament in draft for a period of 40 days meaning that, because of the summer recess, it is not expected to come into force until late November.   

The Code is important because it sets out TPR’s expectations and guidance on how schemes should comply with their obligations under the new regulations.  Trustees will therefore welcome TPR’s press release on Monday 23 September confirming that schemes with valuation dates on and from 22 September should now refer to the new Code (even though it is not yet officially “in force”).   

As a reminder, alongside the Code sits TPR’s “twin track” regulatory approach which you can read more about in our August update.  The parameters for the “fast track” regulatory approach are now set, and schemes that don’t meet those parameters will need to make a “bespoke” submission instead.  The fast track parameters are, effectively, a set of criteria by which TPR will assess a scheme’s risk level – those meeting the parameters are unlikely to be investigated further by TPR, whereas those using the bespoke route will be subject to further scrutiny.

Schemes with valuation effective dates before 22 September 2024 should continue to refer to the previous version of the Code (and the previous scheme funding regulations).  Information for those valuations should be submitted to TPR via Exchange as per the previous process.

Statement of strategy

One of the requirements under the new FIS Regulations is that schemes have to submit a “statement of strategy” to TPR “as soon as reasonably practicable” after preparing their funding and investment strategy.  The Regulations require TPR to specify the form of the statement and TPR has been consulting on a proposed approach but has yet to finalise it. 

The proposed form of the statement which TPR put forward in its consultation attracted some industry concern that it was overly burdensome, and required too much information from schemes. On 23 September TPR published an interim consultation response, together with four “illustrative template” statements. 

The interim response advises that TPR has responded to industry feedback and scaled back the level of information that it will be asking schemes to provide.  It sets out a summary of the key comments raised, and the changes TPR has made in response.  These include:

• Simplified statement of strategy templates (though they are still significant documents which will take time to complete)
• The definition of small schemes has been harmonised with the definition in the Code (broadly, 200 members or fewer). Small schemes will be subject to the same duties but evidencing compliance will be less onerous, including the level of information required in the statement of strategy is less detailed and, where fast track parameters are met, small schemes will not be required to submit detailed covenant information;
• No requirement to submit detailed covenant information for “low risk” schemes (including those schemes that are in surplus (where past the relevant date in the case of a scheme using the bespoke route) and those on the fast track that are fully insured)
• Changes to actuarial methodology 

Once finalised, there will be a new digital service through which schemes will be able to submit their statement of strategy and valuation documentation – this is expected to launch in November 2025.  Until the system is live, schemes with valuation dates on and from 22 September are not expected to submit their strategy statements – they should wait until the new system is live. TPR has confirmed it will not treat a delay in submission during this period as a breach. 

TPR advises that it will publish a “fuller” response to the consultation “in the winter”.

Employer covenant

An understanding of the employer covenant supporting the scheme is at the heart of the new funding regime.  For the first time, the FIS Regulations require trustees to undertake employer covenant analysis, in order to formally consider and record the risk of employer insolvency and the trustees' view on covenant reliability.  In addition to the expectations around employer covenant analysis already set out in the Code, TPR is preparing guidance to provide more detail about those expectations.

TPR said on 23 September that it expects to publish this new covenant guidance “in the next few months to make it available as early as possible for trustees who are starting to prepare their valuations”.

Next steps

As set out above, there are still a number of documents and developments we’re awaiting from TPR to help schemes understand and meet their obligations under the new FIS Regulations but these updates from TPR will be very welcome in the intervening period, particularly for those schemes with valuation effective dates over the next couple of months.  For all schemes, early engagement and planning will be key as they enter into their first valuation cycle under the new regime.

If you have any questions about your scheme’s valuation and the new legal requirements please do get in touch with your usual Burges Salmon pensions team contact, or with Richard Knight, Head of Pensions & Lifetime Savings.