Keating and Clacher’s last post; the DWP Funding Regs. consultation ends today


The DWP’s Funding Regulations consultation closes today (17/10/22). This is the 9th and closing article from Keating and Clacher dealing with the consultation.

Iain Clacher & Con Keating (authors of this post)


This is the ninth and last in our series of blogs addressing the questions posed in the DWP’s Funding Regulations consultation. Links to previous blogs may be found at the end of this blog. We follow the same conventions as in previous blogs.

Before continuing with the final few questions posed in the Consultation, we cover two relevant issues not raised within the consultation: sponsor insolvency and ‘journey plans’.

Several major actuarial consultancies have reported that the implementation of the proposed Regulations will result in the insolvency of 200 – 250 schemes. We have insufficient data to conduct that analysis. These projections are material; they represent five to ten years of recent average PPF experience. They are almost twice the highest ever annual number experienced by the PPF. The wisdom of introducing these Regulations now is highly questionable, given the state of the economy and corporate insolvencies, which have been rising for rather a while and seem likely to continue to increase.

Figure 1 shows corporate failures in England and Wales as reported by the Insolvency Service, for the period January 2019 to August 2022 together with a recent trend line.

Figure 1: UK corporate insolvency, January 19 to August 2022

Is this really the time to introduce the additional burdens of the Regulations on companies already facing extremely difficult trading conditions?

The consultation and Regulations refer frequently to a ‘journey’ plan. In our writings on discount rates, we have referred consistently to the trajectory of liability values determined by a particular discount rate; we might have called this a ‘journey’ plan.

This makes evident the role of the discount rate. It is not a risk of the benefits ultimately payable to members but rather is concerned with the path to meeting those liabilities. There is no ‘correct’ discount rate; there are a plethora of rates which are feasible and plausible.

The ‘journey’ plan or trajectory is an amortisation schedule. There is an optimal discount rate: the compound rate of return determined by equalisation of the contribution made and the benefits projected. We have referred to this as the Contractual Accrual Rate and have noted elsewhere that it is used by HMRC for some long-term contracts.

Using market-based rates, such as gilt or corporate bond yields, introduces discontinuities into the trajectory or ‘journey’ plan, and unless these yields are unchanged, a most unlikely situation with market rates or prices, the associated assets required for funding purposes will therefore require rebalancing, with further funding needed for those where rates have declined.

Note also that for those where rates have declined, there is a ‘trapped surplus’ problem as a scheme sponsor cannot easily, or in many cases, in any circumstance other than full discharge of all liabilities, retrieve part or all of the surplus funds – they are trapped, and even if a refund is achieved this would attract a 35% rate of tax. This ‘trapped surplus’ problem is likely to become both very common and very substantial given the higher levels of funding that will be demanded under these Regulations. It is an appalling waste of investment resources, and very painfully so when they are invested as low-dependency asset portfolios.

All that hedging of the discount rate does is to fix the trajectory defined by the discount rate prevailing at the time of introducing the hedge. It is not a risk to pensioners that is being hedged.

Moving to the first of the Consultation questions, unanswered in previous blogs. The first is concerned with the requirement to appoint a chair of trustees.

Question 18: Do you agree that these are the appropriate requirements for the scheme trustee board when appointing a chair? Are there any other conditions that should be applied?

Requirements for chair of trustees


A chair of the trustees appointed under section 221B (7) of the Act must be


(a) an individual who is a trustee of the scheme;

(b) a professional trustee body which is a trustee of the scheme;

(c) where a company which is not a professional trustee body is a trustee of the scheme, an individual who is a director of that company and through whom the company exercises its functions as trustee of the scheme, or a professional trustee body which is a director of that company; or

(d) in the case of a scheme established under section 67 of the Pensions Act 2008 (duty to establish a pension scheme)(a) a member of the trustee corporation established under section 75 of that Act (trustee corporation).


Response: The requirements listed are sensible. We do not believe that there should be any further conditions applied: the chair is a trustee of the Scheme.


There are two Regulations, 18 and 19, for which the Consultation poses no questions:


Form of statement of strategy

  1. The statement of strategy must be submitted in a form as set out by the Regulator.


We believe that this new power for the Regulator should require Parliamentary approval.


Information to be sent with actuarial valuation

19.—(1) For the purposes of section 224(7A) of the Act (actuarial valuations and reports), the information that the trustees or managers of a scheme must send to the Regulator with a copy of an actuarial valuation is the relevant statement of strategy.

(2) In paragraph (1), “the relevant statement of strategy” means the scheme’s statement of strategy setting out the funding and investment strategy for which the actuarial valuation referred to in paragraph (1) is the actuarial valuation to which the funding and investment strategy relates.


This seems straightforward and unobjectionable.


Part 4 of the draft Regulations  is concerned with amendments to existing regulation, beginning with

20.—(1) The Occupational Pension Schemes (Scheme Funding) Regulations 2005 are amended in accordance with paragraphs (2) to (9).


2) In regulation 2(1) (interpretation), in the appropriate places, insert …  ““relevant date” has the meaning given by regulation 2 of the Funding and Investment Strategy Regulations;”.


We note that Regulation 2 in turn refers to Regulation 8.


Question 19 becomes relevant with the next amendment:


Question 19: We would like to know if you think these requirements will work in practice?


We would like to draw attention to one element which contains some pointless ‘gold-plating’.


  • (4) In paragraph (4) of regulation 7 (actuarial valuations and reports)(a) at the end of sub-paragraph …
  • (b) … insert:


(c) the actuary’s estimate of—

(i) the maturity of the scheme as at the effective date of the valuation,

(ii) the maturity of the scheme as at the relevant date, and

(iii) the date on which the scheme is expected to (or, if applicable, did) reach significant maturity, and


(d) the actuary’s estimate of the funding level of the scheme as at the effective date of the valuation, calculated in accordance with the requirements in regulation 9(2)(a) and (b) of the Funding and Investment Strategy Regulations and expressed as a percentage. [Emphasis Added]



 There are some difficulties here. The “relevant date” of the scheme is defined elsewhere in terms of “significant maturity”. We also do not see any reason for a scheme which has passed significant maturity should go back and calculate that date – it serves no purpose but to add to scheme costs.

As we are not legal scholars, we shall refrain from offering any substantial response, but would draw attention to the reservations we have expressed in previous blogs when discussing the Regulations referenced in these amendments.


The consultation continues with:


Question 21: Do you consider that the new affordability principle at draft regulation 20(8) should have primacy over the existing matters, if they do remain relevant?


The amendment reads:

(8) After paragraph (1) of regulation 8 (recovery plan) insert—


“(1A) For the purposes of subsection (3A) of section 226, in determining whether a recovery plan is appropriate having regard to the nature and circumstances of the scheme, the trustees or managers must follow the principle that funding deficits must be recovered as soon as the employer can reasonably afford.”.


Response: The question is ambiguous, but we do believe that the intention of this regulation is to place emphasis on rapid funding of the scheme rather than accommodating sponsor employers. That said, we do not believe that this should have primacy. We are already seeing schemes which have achieved large technical provisions surpluses where the sponsor employer has previously made substantial deficit repair contributions which cannot be recovered from the scheme, in large part because the tax cost of such recoveries is excessive. The problem of such stranded assets will grow much larger when the discount rate is set as a low-dependency rate.


In any event, the following should be added after “reasonably afford”.

“In determining what the employer can reasonably afford the trustees or managers must minimise minimise any adverse on the sustainable any adverse impact on the sustainable growth of an employer,”.

This follows the wording in the Pensions Act 2004, Section 5(1)(cza).


Question 22: Will the requirements in draft regulation 20(9) work in practice for all multi-employer pension schemes?


The Regulation reads:


9) In paragraphs 1(1), (4) and (6), 4(4), 5(3), 7 and 10 of Schedule 2 (modifications of the Act and Regulations), after “Part 3 of the 2004 Act” each time it occurs insert “, the Funding and Investment Strategy Regulations”.




As we have no practical experience of managing multi-employer schemes, we shall refrain from offering any response.


Question 23: Do you agree with the information presented in the impact assessment for the funding and investment strategy?


The narrative in the Consultation is worth reproducing:


Chapter 6 – Business burdens and regulatory impacts


6.1. An impact assessment considering the business impacts of requirements for defined benefit pension scheme trustee boards to appoint a Chair and to regularly prepare, review and submit a statement of strategy to the Pensions Regulator was published as part of the enactment of the measure in the Pension Schemes Act 2021. This assessment is not considered to have changed materially.


We expressed reservations as to the adequacy of the impact assessment accompanying the Pension Schemes Act 2021 at the time it was published. We also covered the recent impact assessment accompanying these Regulations in our previous blog, No. 8. It is worth revisiting that earlier impact assessment.


“What is the problem under consideration? Why is government intervention necessary?


The current legislative framework is supported by (non-statutory) guidance from TPR in the Defined Benefit Funding Code of Practice3. In TPR’s research survey4, 92% of trustees interviewed stated they had read the DB code of practice or a summary of it provided by the adviser. However, only 64% of trustees stated they had carried out all five of the activities named in the survey intended to assist in the management of funding, investment and covenant risks. This presents evidence to suggest that the non-legislative framework is not sufficient to encourage these behaviours from trustees. We want to encourage behavioural change across all schemes. The objective here is compliance with a non-statutory funding code.” [Emphasis Added]

We do not consider the survey referenced as a reliable source of evidence. The survey does not explicitly state what the five ‘desired activities’ are. The survey does not even list the questions posed; it merely states that

“The survey was conducted using Computer Assisted Telephone Interviewing (CATI). Interviews lasted 23 minutes on average.”

The survey does mention the word ‘activity’ nine times and ‘activities’ 46 times but leaves us unenlightened as to what these ‘five activities’ are supposed to be.

Indeed, at one point the survey seems confused itself:

“Of the 80% of trustees who undertake activities to establish risk tolerance, two thirds (67%) of trustees carried out all four activities asked about in the survey, compared to 73% of employers.”

The word ‘activities’ does not appear in the Code, and the two instances of the use of ‘activity’ are unrelated to the subject under discussion here.

We also have methodological concerns with a further aspect of the conduct of the survey.

“In the interest of making the survey efficient, in nearly all cases possible responses to the survey questions were read out to respondents. The respondent would then say which, if any, of the responses applied to their scheme (typically activities which were carried out).” Select a response we have written as the answer to a question we have also written is methodologically suspect as a survey procedure.

We are told:

“The survey covers seven of the nine principles expounded in the DB Funding Code (Code 3): The main survey objective was provide [sic] a performance measurement against seven of the nine principles of the DB funding code of practice, among both trustee boards and employers of DB schemes.” And in a footnote that these principles are: “Working Collaboratively, Managing Risk, Taking Risk, Taking a Long-term View, balance, Fair Treatment, Reaching Funding Targets. NB the Proportionality and Well Governed principles were excluded.” 

Proportionality is a very strange principle to omit. It is stated as in the Code as:

Trustees should act proportionately in carrying out their functions given their scheme’s size, complexity and level of risk.”

The DB Funding Code itself makes the point that proportionality is critical for trustee behaviour.

“20. The concept of proportionality is an important one to which we refer throughout the code. Factors that trustees should take into account in deciding what is proportionate for their scheme include:

  • the size of the scheme (both in absolute terms and its size relative to the size of the sponsoring employer) and the strength of the employer covenant

  • the funding level of the scheme

  • the complexity of the proposed investment strategy, the investment related risks undertaken and the reliance placed on the employer covenant

  • the likelihood that employer covenant, investment or funding risks will crystallise and their impact if they do

  • the potential costs and benefits of any proposed approach; and

  • the complexity of scheme design and employer relationships (as, for example, with non-associated multi-employer schemes)

Excluding proportionality from the survey principles was, we believe, a major error which renders the published results unreliable and of extremely questionable evidential value. It completely undermines the following statement:

“Government intervention is necessary to ensure the current quantitative process of assessing scheme funding through an actuarial valuation is complemented by a qualitative narrative from the trustee board that explains their approach to decision making and risk management.”

Note, however, the limited purpose attributed to the Act, a complementary qualitative process. These proposed Regulations go well beyond that and will require radical revision of existing quantitative processes.

The limited ambition of the Pension Schemes Act 2021 is further elucidated in the following section of the Impact Assessment which accompanied it:


What are the policy objectives and the intended effects?


These are to:

  • support good governance; improve trustee decision-making in relation to scheme funding by requiring trustees to explain their approach or how they are complying with legislative requirements;


  • support collaboration between the trustee board and the sponsor employer; and


  • enable TPR to enforce a stronger “comply or explain” regime for all Defined Benefits schemes in relation to scheme funding.


Ultimately the intended effect is to enhance security of members’ pensions.”


The proposed Regulations go well beyond any reasonable interpretation of a stronger “comply or explain” regime. Note also that the Act sees it provision as applying to all schemes; there is no carve for open schemes.


Question 24: Do you expect the level of detail required for the funding and investment strategy to increase administrative burdens significantly?



Yes. We have covered this in greater detail in a later blog concerned with the new Impact Assessment.

We estimate that the increased burden will be of the order of £400 million – £600 million annually. This will be a great time for actuaries, consultants, and pensions lawyers.


The earlier assessment was highly questionable:


Total Net Present Social Value [1] Business Net Present Value Net cost to business per year
£ -148.9m £-148.9m £17.3m  


But the latest assessment is rather more than not credible; it is risible. The claims made in the Consultation for this impact assessment are shown below, as 6.4.


 Total Net Present Social Value (in 2019 prices) (over 10year period): £-2.4m Equivalent Annual Net Direct Cost to Business (EANDCB- in 2019 prices) (over 10-year period: £0.3m



“6.4. At this stage, we give a high-level assessment of possible business and other impacts. The business impacts will mainly be for schemes whose technical provisions are currently weaker than that which would be required for them to achieve low dependency investment allocation and achieve full funding on a low dependency funding basis at significant maturity. We anticipate there to be minor familiarisation and implementation gross cost to business, partially offset by savings for schemes associated with improved clarity of the requirements.”


The consultation narrative states:


“6.3. We will not be able to determine the full impacts and costs that are introduced by these legislative changes until the detail of all components of the regime are known. This includes the Pensions Regulator’s revised Defined Benefit Funding Code of Practice which will contain more detailed guidance and specification on how to comply with legislative requirements in setting the funding and investment strategy. A Business Impact Target will be completed by the Pensions Regulator following their consultation to accompany the revised Defined Benefit Funding Code of Practice. Once that is completed, we will update our impact assessment of these legislative changes accordingly.”  [Emphasis Added]


And further that:


“6.5. The impact of any changes to deficit repair contributions as a result of the funding and investment strategy will be included in the Regulator’s Business Impact Target assessment. These costs would result from legislative changes however it is the Pensions Regulator’s revised Defined Benefit Funding Code of Practice which will determine the scale of these costs.” [Emphasis Added]


This is simply not acceptable. Parliament is being asked to enact legislation without any meaningful assessment of its costs or indeed economic and financial substance. If it is necessary to wait until the revised version of the DB Funding Code is available in order to have those figures, then that is what should be done.


Question 25: Do you agree with information presented in the impact assessment for the statement of strategy, referenced in paragraph 6.1?




No, See our response to Question 23 above. Note also that the current Impact Assessment has been covered in an earlier blog [8].


 Having written almost 30,000 words in the analysis of, and response to the consultation and draft Funding Regulations, we had intended to produce a summary of the issues raised in these nine blogs. Unfortunately, events in the form of the gilt market LDI disruptions have overtaken us and precluded doing that in timely fashion. Our blogs have been overwhelmingly concerned with problems that would arise if the Funding Regulations were implemented. One of the lessons that should be learned from the recent crisis is that DB schemes following similar strategies are capable of disrupting even the largest of our financial markets. The proposed Regulations would impose even greater similarity on schemes. In light of this we would urge mostly strongly that the draft Funding Regulations be withdrawn in their entirety. New Funding Regulations may be drafted once the form of resolution of the LDI crisis has been determined and implemented.

Links to DB Funding Regulations blogs

Blog 1:

Blog 2:

Blog 3:

Blog 4:

Blog 5:

Blog 6:

Blog 7:

[1] Social value refers to all of the impacts that an intervention, policy or project has on society and the value that these impacts have, both positive and negative. The social value of a project is the net value generated to society.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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