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Freshfields Risk & Compliance

| 4 minutes read

UK Pensions Regulator publishes consultation on DB funding code

Christmas has come early to the world of defined benefit (DB) pension scheme funding. The Pensions Regulator (TPR) has just delivered a hefty 200+ page consultation on the new draft DB Funding Code (Draft Code). Back in March 2020, TPR consulted on the principles that should underpin its regulatory approach to scheme funding; the Draft Code reflects some of the feedback on that earlier consultation. 

The Draft Code sets out the approach of TPR in relation to the new regulations being developed by the Department for Work and Pensions (DWP) in relation to DB scheme funding (the Draft Regulations) in the light of the introduction by the Pension Schemes Act 2021 of a new requirement for schemes to have a funding and investment strategy (which we looked at in our last blog on this topic).

Fast Track and Bespoke Track

The most immediately notable change in the Draft Code concerns the way TPR characterises the twin-track regulatory approach of the “Fast Track” and “Bespoke Track” for schemes, which it proposed in its March 2020 consultation (which we discussed in more detail here). These concepts have changed and have been removed from the Draft Code itself, and instead are part of a separate consultation.

In TPR’s new model, Bespoke and Fast Track are lenses through which TPR will assess scheme valuations. Bespoke is the default and is intended to be truly flexible, consistent with the concept of scheme specific funding, albeit within the parameters set under the funding legislation (including the Draft Regulations). Fast Track is essentially a set of criteria which, if met, means a scheme is unlikely to be scrutinised by TPR further, such that compliant schemes can expect a light touch regulatory approach.

The three key components of this Fast Track “filter” are:

  • Funding target – a significantly mature scheme should have a discount rate of Gilts+0.5%, with more flexibility for schemes further from significant maturity. There is guidance on other assumptions which can be adopted.
  • Stress test – the scheme should be able to pass the PPF’s stress test.
  • Recovery period – the recovery plan (if any) should be for.


The Draft Code may help allay one concern raised by the industry about the DWP’s Draft Regulations: investment risk tolerance. Concerns were raised in the industry that the “low dependency investment allocation” (LDIA) under the Draft Regulations would require significantly mature schemes to be almost exclusively invested in gilts by significant maturity. TPR has interpreted the LDIA much more permissively. The Draft Code gives an example of a “broadly matched LDIA being split between 85% in bonds and gilts and 15% in growth assets. The Draft Code also suggests that significantly mature schemes could have investments in property and infrastructure.

The Draft Code says that the LDIA requirements do not limit trustees’ discretion over investment matters, and that there might be good reasons in the short term to move away from the LDIA. However, TPR’s expectation is that investment decisions will generally be consistent with the strategies set out in the funding and investment strategy (which would include targeting the LDIA at significant maturity).

Employer covenant

For the Fast Track, the set of criteria apply irrespective of covenant grading. However, for the Bespoke Track, it seems settled that the strength of the employer covenant will be central to TPR’s tolerance of higher risk profiles in a scheme. The Draft Code is clear that trustees “must bear in mind the strength of the employer covenant” in determining the appropriate journey plan for their scheme.  The Draft Regulations require trustees to assess key factors such as the financial ability of the employer to support the scheme and any legally enforceable contingent assets (e.g. parent company guarantees), along with more specific metrics such as the employer’s cash flow, the likelihood of an employer insolvency event, and the nebulous catch-all category of “other factors that are likely to affect the performance and development of the employer(s) business.” The Draft Code re-emphasises this more holistic approach that will be required from trustees. It also provides a gloss on the “other factors”, which will include: (a) the employer’s market outlook & position in the market; (b) strategic importance of the employer in its group and the resilience of that group; and (c) the diversity of the employer’s operations and ESG related risks and opportunities.


One recurring criticism made of the Draft Regulations was of a perceived ‘one size fits all’ approach, which might disproportionally impact smaller schemes (which might be carrying out a full employer covenant analysis for the first time) and larger schemes (often with more complex employer covenants). Helpfully, the Draft Code qualifies many of the requirements by proportionality, including (a) the depth and frequency of assessments of covenant support; (b) setting the LDIA; (c) assessing the level of risk that can be supported. The broader implication is that the approach that trustees take to discharging each of their obligations must be “proportionate to the circumstances of the scheme”. However, it does seem clear that smaller schemes will experience at least an initial increase in adviser costs.

Significant maturity

As anticipated in the Draft Regulations, TPR has confirmed that the duration of liabilities at which a scheme reaches significant maturity is 12 years. However, it is important to recognise, as TPR does itself in the consultation document, that the Draft Regulations have not yet been finalised. TPR explicitly notes that any changes to the Draft Regulations “will need to be reflected in our final code.” The definition of the crucial concept of significant maturity was the subject of extensive feedback in the DWP’s consultation on the Draft Regulations, so this definition may not be settled just yet.

What’s next?

The consultation on the Draft Code will be open for 14 weeks. TPR anticipates that, following consultation, the Draft Code will be laid before Parliament in Summer 2023, so that it can come into force alongside the finalised Draft Regulations in October 2023.

We will issue a further blog in the New Year with our more detailed thoughts.

If you would like to discuss any issues relating to the new scheme funding regime, the Pension Schemes Act 2021, or the pensions “endgame” more generally, then please get in touch with your usual Freshfields contact or any of the authors.


pensions, funding, investments, regulatory