Pension Schemes Act 2021 requires long-term
strategy from trustees and employers
What you need to know
- The Pension Schemes Act 2021 (the Act) puts in place the legislative framework for the new defined benefit (DB) scheme funding regime.
- The Act requires that trustees produce a ‘statement of strategy’ (also known as a DB chair’s statement).
- Part 1 of the statement of strategy must be agreed with the employer and sets out the long term funding and investment target for the scheme (the ‘funding and investment strategy’). Technical provisions must be calculated consistently with this strategy.
- Part 2 of the statement will require trustees to reflect on the success of their funding and investment strategy, including how risks are being managed or mitigated and a reflection on past decisions where relevant.
- Implementation of these changes and greater detail on the requirements will require further regulations and a new code of practice from The Pensions Regulator (TPR).
Actions you can take
- Understand the likely changes to funding rules now to inform discussions about funding and investment strategies for DB schemes and to give more time to prepare for the changes.
- Read the quick guide to the associated March 2020 TPR consultation for detail of the principles of the new funding regime.
- Benchmark your existing strategy against likely best practice under the new regime.
- Start discussions between relevant parties so employers and trustees can review or start to agree their future funding and investment strategy.
- Look out for the upcoming regulations and TPR’s 2021 annual funding statement and second consultation, which will provide further insights (particularly for those undertaking valuations).
The finer detail: Funding implications of the
Pension Schemes Act 2021
Expected timeline for the new funding regime
Statement of strategy part 1 – Funding and investment strategy
Trustees will be required to set (and keep under review) a strategy for ensuring that pensions can be provided over the long term. As part of this trustees need to consider the future journey of the pension scheme, as the strategy will state the target funding level and investment strategy at specified future dates.
A scheme’s funding and investment strategy must be agreed with the employer.
Technical provisions (liabilities in a triennial scheme funding valuation) must be consistent with a scheme’s funding and investment strategy. This will introduce a real focus on long-term targets and journey planning into valuation discussions.
Statement of strategy part 2 – Supplementary matters
Trustees will need to provide comments on at least the following:
- Whether the trustees believe their funding and investment strategy is being
implemented successfully and any remedies where necessary;
- The main risks faced by the scheme and how these will be managed or mitigated; and
- Reflections on significant past decisions and lessons learned.
Trustees must consult with the employer on part 2 of the statement of strategy.
Regulations may require trustees to share this document with TPR. Although the detail is still to be confirmed, perhaps we could see this as part of the information submitted when a scheme funding valuation is completed.
Chair of trustees
The statement of strategy will have to be signed by the chair of a scheme’s trustees, meaning that a chair must be appointed for any scheme currently without one.
Where requirements in relation to the funding and investment strategy or statement of strategy is not complied with, civil penalties will apply to trustees.
For further information, please get in touch with Stephanie Cole or speak to your usual XPS contact.