We take a look at key pensions issues in the coming year and consider what key questions scheme employers and trustees should have on their agenda.


This update covers the position in England and Wales.

1. Scheme funding regime changes

Changes to scheme funding regulations and the Pensions Regulator's DB funding code are expected to take effect for schemes with valuation dates from October 2023 onwards.  Alongside the actuarial valuation, trustees will be required to prepare a formal scheme funding and investment strategy which must be agreed with the scheme employer and submitted to the Pensions Regulator (TPR).  Just before Christmas, TPR published a consultation on its draft DB funding code which sets out the principles TPR expects trustees to follow.  

What are the key principles (and jargon) that you need to understand?
  • LTO:  long-term objective, ie how the trustees intend benefits will be provided over the long-term, eg via a buy-out or running the scheme on with low dependency on the employer.  The LTO needs to be included in the funding strategy. In the case of schemes closed to new members, the LTO is the "end game".
  • Journey plan: the scheme's planned progress towards being at least 100% funded on a low dependency funding basis by the relevant date (see below). For example, the journey plan should cover the proportion of assets intended to be allocated to different categories of investments as the scheme moves along its journey plan. The journey plan forms part of the scheme's funding and investment strategy.
  • Relevant date: a date set by the trustees which must be no later than the end of the scheme year in which the scheme is expected to (or did) reach significant maturity (as defined by the regulations and code).  The trustees must target at least 100% funding on a low dependency funding basis by this date.
  • Low dependency funding basis: using actuarial assumptions under which no further employer contributions are expected to be required to fund accrued benefits (once the scheme is fully funded on that basis) and the assumed investment strategy is:
    • to broadly match cash flow from investments with payments under the scheme; and
    • to invest in such a way that the value of scheme assets relative to liabilities is highly resilient to short-term changes in market conditions.
  • Significant maturity: broadly, this is a calculation which looks at the average time (duration) until payments under the scheme are expected to be made, weighted by the discounted value of the relevant payments.  The draft code provides that the duration at which a scheme reaches significant maturity is 12 years and sets out a formula which TPR expects will normally be used for calculating duration.
  • Fast Track:  TPR's original consultation in 2020 proposed two routes for complying with the funding code, Fast Track and Bespoke, under which schemes following the Fast Track route could expect minimal regulatory involvement.  For Fast Track, TPR planned to set out standards in relation to all aspects of funding and investment arrangements, and a scheme would only qualify as Fast Track compliant if it satisfied every aspect.  Any scheme not qualifying for Fast Track would be classed as following the "Bespoke" route, with trustees having to explain the divergence from Fast Track.  TPR's funding consultation published in December 2022 retains the concepts of Fast Track and Bespoke, but explains that Fast Track will be a filtering mechanism adopted by TPR rather than forming part of the code.  TPR includes the Fast Track parameters in a separate document rather than the code itself.  This will give TPR more flexibility to change the Fast Track parameters at short notice.  For a scheme to qualify for Fast Track the actuary will have to confirm that it meets the Fast Track parameters. .Schemes that meet those parameters are unlikely to have their funding approaches scrutinised by TPR. That is not to suggest that all schemes following the Bespoke route will attract TPR scrutiny.  TPR recognises that there can be good reasons for following the Bespoke route.  
  • Employer covenant assessment:  TPR plans to move away from an internal assessment based purely on covenant grades to one that better considers the three "fundamental covenant pillars" of cash flow, contingent asset value, and the prospects of the employer and its wider group.
  • Reasonable affordability: The draft regulations provide that deficits should be cleared as soon as the employer can reasonably afford.  The draft code says that this does not necessarily require the entirety of an employer's available cash to be used to pay down the deficit.  It depends on the circumstances of the scheme and the employer.  However, the draft code sets out the principles which TPR expects trustees to adopt when considering alternative uses for the employer's available cash.  It indicates TPR will scrutinise alternative uses particularly closely if a scheme has already reached significant maturity and is in deficit, or if its funding level is low.
Are the scheme funding regulations and code now in final form?

No, the regulations and code have only been published in draft so far, so we may see changes or even further consultations.  For the code to come into force by October 2023, it will need to be laid before Parliament by June 2023.

Key questions re the new funding regime: do you know the answers for your scheme?
  1. Is it likely that the next scheme valuation will fall under the new funding regime?
  2. If the scheme is closed to new members, have the trustees and employer already agreed on the long-term objective (eg buy-out)?
  3. Has the scheme already reached "significant maturity" under the proposed definition or, if not, approximately when it is likely to do so?
  4. Is the scheme currently fully funded on a low dependency funding basis?  If not, when is that level of funding likely to be achieved? Is the scheme on course to reach full funding on a low dependency funding basis before it reaches significant maturity?
  5. If the scheme's investment allocation were to mirror that assumed for the purposes of TPR's "low dependency funding basis", what would that look like? If the scheme's actual investment allocation differs from this, what is the rationale for the scheme's approach?
  6. Is the scheme likely to use the Fast Track or Bespoke route for complying with the new funding regime?
  7. When assessing employer covenant, TPR plans to focus on cash flow, contingent asset value, and the prospects of the employer and its wider group.  Are any of these areas likely to attract particular focus from TPR in relation to the employer covenant?
  8. If the scheme is in deficit, is the employer planning to use all available cash for deficit repair contributions?  If not, is the employer's use of cash likely to attract intervention from TPR, bearing in mind that TPR is likely to focus in particular on "covenant leakage", eg dividend payments?
2. Issues related to market volatility: what key issues should you consider?

We expect the fall-out from the September 2022 "mini-budget" to continue in 2023. In its November 2022 statement, TPR said that it is continuing to focus on market volatility and liquidity issues and that it will issue a further update in its Annual Funding Statement in April 2023.   We also expect to see high levels of buy-in/buy-out activity, stemming in part from schemes looking to take advantage of improved funding positions due to higher gilt yields. 

With high levels of activity in the bulk annuity market, insurers may be in a position to pick and choose which schemes they deal with.   From our extensive experience of reviewing benefit specifications for buy-ins/buy-outs, we know that issues can sometimes crawl out of the woodwork at that stage, eg if it's not clear whether a deed of amendment was validly executed.  We therefore advise that preparatory work for buy-ins/buy-outs should be completed in good time to ensure last minute issues don't get in the way of completing a deal when market conditions are right.

Key questions for trustees/employers to consider re potential legal issues related to market volatility and buy-ins/buy-outs
  1. If collateral/margin calls are made, in what circumstances would scheme assets be sold automatically and in what circumstances would a trustee decision be required?
  2. Are the scheme trustees up to speed on TPR's expectations of trustees as detailed in its latest statement relating to market volatility and LDI?
  3. Do the scheme's fund managers have an up-to-date list of trustee signatures?
  4. Do the trustees have procedures in place for making scheme investment decisions urgently if required, and do those procedures allow for the possibility of one or more individuals being unavailable (eg due to illness)?
  5. Would it be sensible to have arrangements for the scheme's sponsoring employer to provide a short-term loan facility to the scheme if required in order to better manage LDI strategies and collateral calls?
  6. If trustees are looking to complete a buy-in in the foreseeable future, is there a project plan in place and do the trustees and employer understand the steps and timescales involved?
3. Transactions and refinancings: what key issues should you consider?

Following the Government's 2021 consultation on changes to the notifiable events regime, there was widespread expectation that changes would take effect from 2022, but this did not happen.  The Government has not said when the changes might come into force, but has not suggested they have been abandoned, so it seems likely that changes will be made in 2023, possibly at short notice.  The length of time that has elapsed since the original consultation might suggest that we will see some changes to the final form regulations. The two "obvious" potential coming into force dates are 1 April and 1 October, as the DWP's general policy is to make changes from one of these two dates.  However, there is nothing to stop the Government choosing a different effective date. 

If the notifiable events changes proposed in the original consultation are made, this will create two new events which must be notified to TPR: a decision in principle by a scheme employer to: (a) sell a "material proportion" of its business and assets, or (b) grant or extend a "relevant security" ranking ahead of the pension scheme. They will also require a decision to sell a scheme employer to be notified to TPR at an earlier stage and require additional information to be provided to TPR.  Scheme employers involved in corporate activity, including refinancings, should therefore consider what information they might be required to notify to TPR if the notifiable events changes are brought into force before the deal completes.

TPR has recently used blog posts on its website as an informal means of communicating its expectations of scheme employers and trustees in relation to corporate transactions and refinancings.  Key points from TPR's blog post in relation to refinancings are:

  • TPR expects employers to disclose details of refinancings to trustees, including draft legal documents.  This should be done in sufficient time before completion to enable trustees to consider impact on the scheme;
  • TPR expects the employer to share with the trustees any forecasts, scenario analysis and other information provided to lenders;
  • TPR expects trustees to consider refinancings in detail, eg impact on employer free cash flow.  This means that to meet TPR's expectations, employers need processes to ensure that all material refinancings and restructurings are disclosed to trustees at an early stage.  Even if the employer expects the refinancing/restructuring to have a neutral or positive effect on the employer's covenant, TPR will still expect the employer to provide details to the trustees in advance so that trustees can understand the impact and sense check the employer's analysis;
  • TPR expects trustees to consider the impact  of debt transactions where control over existing lending passes from one counterparty to another.

Key points from TPR's blog post in relation to corporate transactions are:

  • trustees will be subject to strict confidentiality provisions, so employers should not use market sensitivity and regulatory notification provisions as an excuse to keep trustees in the dark.  Given TPR's stance on confidentiality issues, it's important that trustees (and directors of corporate trustees) are subject to appropriate confidentiality agreements to ensure that it's possible to meet TPR's expectations around early and proactive disclosure of information to trustees.  If this could involve disclosure of "inside information", there may be additional points which need to be considered;
  • trustees should be provided with direct access to the bidder and its advisers at the earliest opportunity in the transaction process;
  • legally binding agreements with trustees should be put in place before Completion so that purchasers can't "move the goalposts" after Completion; and
  • trustees should not weaken a scheme's funding position and journey plan to facilitate a transaction unless they can clearly demonstrate with reasonable certainty the benefit of doing so, and secure appropriate protections against downside risk.
Key questions to consider in relation to corporate transactions and refinancings
  1. Is there an information sharing protocol in place between scheme employer and trustees?  If so, when was it last reviewed and is it adequate in the light of TPR's expectations regarding the level of information which will be shared?  For example, does it cover refinancings and is it specific about what information will be shared and when?
  2. For trustees: is the covenant monitoring framework adequate?
  3. Is there an agreed procedure for managing conflicts of interest if a senior individual at the employer is also on the trustee board?
  4. For employers: is there any information about upcoming transactions/refinancings which TPR would expect to be shared with trustees?
  5. For employers: for any upcoming transactions (including refinancings), has the possible impact of trustee involvement been considered in terms of both timescale and requests for financial mitigation?
  6. Are there any upcoming transactions/refinancings for which notification will have to be given to TPR if the notifiable events changes take effect before the transaction completes?
4. Pensions dashboards: what points do you need to consider?

The final form pensions dashboards regulations have now been approved by Parliament, with the first schemes required to connect to the dashboards this year, though the Government does not anticipate that members of the public will be given access to dashboards until 2024.  Trustees have legal responsibility for ensuring that their scheme connects to the dashboards on time and makes the required data available to view.  However, given the potential costs involved, and possible reputational issues if a scheme fails to comply, we recommend that employers liaise with their scheme's trustees to ensure they are on course to meet the dashboards requirements.

Key questions re pensions dashboards

1. When is scheme's staging date (ie the date by which it is required to connect to the dashboard service)?

2. Has the scheme administrator confirmed:

  • whether it plans to connect to the dashboard directly or use a third party provider?
  • whether the scheme is on course to be dashboard ready on time and what testing has been done to date?
  • whether the scheme's data is "dashboard ready" (eg available automatically)?
  • whether the scheme will be making use of the transitional provisions for calculating deferred members' defined benefits?
  • what criteria will be used to identify a match?
  • any plans to communicate with scheme members about dashboards?

3. Have the trustees considered how dashboards compliance will impact their contract with the scheme administrators, eg:

  • will service descriptions/KPIs need to be updated?
  • will there be extra costs?
  • what liability will the scheme administrator have to the trustees if the scheme fails to meet its dashboard obligations?

4.  Are there plans to ensure the trustees are data protection compliant in relation to connecting to pensions dashboards, eg plans for carrying out a data protection impact assessment, updating privacy notices and considering contractual arrangements if a third party provider is used to connect to the dashboard?

5.  Will communications with members about pensions dashboards be dealt with solely by the scheme administrator, or do the trustees intend to review/input into such communications?

5. Pensions Regulator's single code of practice

We expect TPR to publish the final version of its single code of practice in the very near future.  The code is due to incorporate the content of ten out of TPR's 15 existing codes.  Whilst much of the code's content is not new, there will be some new elements which should be on trustees' project plans for the coming year, as they are likely to involve a significant amount of work. The draft code included a requirement for trustees to establish an "Effective System of Governance" (ESOG).  This is essentially a collection of policies and procedures that a scheme should have in place to be operating effectively.  The code is also due to contain a requirement for trustees to carry out an annual "Own Risk Assessment" (ORA) to assess how well the governance systems are working.  TPR describes the ORA as a "substantial process" and says that schemes may need to expand their risk assessments to fulfil TPR's expectations.  Assuming the final version of the code is published early in 2023 as expected, we think trustees should be carrying out their initial review action in Q1 or Q2 of 2023 at the latest.

Other areas of new content included in the draft code are:

  • that trustees should establish a remuneration policy applicable to all persons effectively running the scheme, carrying out key functions or whose activities materially impact the scheme's risk profile;
  • the need for trustees to have appropriate investment decision-making processes;
  • the need for trustees to ensure their service providers can demonstrate they meeting TPR's expectations for maintaining IT systems
  • the need for the ESOG to cover cyber risks;
  • the need for trustees to incorporate climate change considerations into their ESOG; 
  • the need for the ESOG to have regard to ESG considerations; and
  • the need to understand and review processes relating to financial transactions to ensure they are processed promptly and accurately.
Key questions for trustees to consider
  1. Is compliance with the single code on the trustees' project plan for 2023?
  2. What existing policies do the trustees have that will form part of the ESOG?
  3. Which policies will require review as part of code compliance and who will be responsible for their review?
  4. Are there any new policies that will need to be put in place in order for the trustees to be code compliant?  If so, who will be responsible for drafting those policies?
  5. What procedures will the trustees put in place for carrying out the ORA?
6. Major changes to law derived from the EU (or maybe not)

The Retained EU Law (Revocation and Reform) Bill currently making its way through Parliament provides for a huge volume of UK legislation derived from EU law to be repealed by default at the end of this year.  Broadly, the default repeal applies to regulations (but not Acts of Parliament) which the UK enacted to give effect to EU law.  The two key exceptions from this principle are financial services legislation (largely excluded from the Bill's scope) and tax (in relation to which the Government has said it will use separate tax legislation to make changes).

A huge amount of legislation relevant to pensions has its origins in EU law (many of the rules on scheme investments, many of the rules on scheme funding, much legislation prohibiting discrimination, and TUPE which protects employees' rights on a transfer of employment).  However, we should not assume that the pensions rule book as we know it will be torn up by the end of the year because the Bill also contains sweeping powers for the Government to:

  • defer some or all of the revocations until a later date (but no later than 23 June 2026); and/or
  • retain laws (with or without amendments) which would otherwise be subject to automatic repeal.
What should employers and trustees be doing re Retained EU Law (Revocation and Reform) Bill?

Employers and trustees should monitor developments.  However, there is currently so much uncertainty surrounding the Bill that attempting to plan for its effects at this stage risks resulting in significant wasted resources.  For now we think it's generally sensible to take a "wait and see" approach to the Bill.

Key Contacts

Rachel Uttley

Rachel Uttley

Partner, Pensions
United Kingdom

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Rachel Rawnsley

Rachel Rawnsley

Partner, Head of Pensions
United Kingdom

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Jade Murray

Jade Murray

Partner, Pensions
United Kingdom

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Catherine McAllister

Catherine McAllister

Partner, Pensions
United Kingdom

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