Regulator publishes annual funding statement for DB schemes

On April 27, 2023, the Regulator published its annual funding statement for DB schemes. This statement is essential reading for trustees of schemes with valuation dates between September 22, 2022, and September 21, 2023 (known as Tranche 18, or T18).

It is also relevant to schemes undergoing significant changes that require a review of their funding and risk strategies. The Regulator recognises that this year schemes may be in a transformed funding position, and its key messages are:

• As most schemes have improved funding levels trustees will need to consider whether their long-term targets remain appropriate, whether buy-out is viable or other end-game options apply.
• If funding levels have improved significantly, trustees should consider whether continuing with the existing investment strategy is in members’ best interests. The Regulator urges applying some of the funding gains towards a less risky funding and investment strategy designed for a smoother and more predictable transition to the long-term funding target.
• Where schemes were unable to meet the LDI collateral calls in 2022, their funding level will have fallen. Trustees will need to rest the funding and investment strategies to reach their long-term targets and should also review their governance processes to ensure future resilience. The Regulator urges trustees in this position to read its LDI guidance.
• Whatever level of investment risk trustees take, it should be supported by the employer covenant and the impact of any changes as a result of recent market events should be assessed.

The Regulator has divided the DB universe into 3 groups:

• Group I – where funding level is at or above buy-out.
• Group II – where funding level is above technical provisions but below buy-out.
• Group III – where funding level is below technical provisions.

For each Group, the Regulator has set out guidance in respect of rethinking scheme strategies in relation to funding position, investment consideration, and covenant considerations. The funding statement also provides a set of tables so that trustees can match their specific scheme circumstances in terms of funding characteristics, employer strength and scheme maturity with the Regulator’s expectations. However, the Regulator stresses that the tables are inexhaustive and are no substitute for reading the funding statement and seeking specialist advice.

Our May briefing will look in more detail at the annual funding statement.