Helping you with valuations under the new DB funding regime – our key practical tips

Focus on strategy, not just compliance

Stronger funding levels and the continued evolution of the endgame landscape mean that an actuarial valuation is an ideal time to step back and take a strategic view. All schemes are now required to set a long-term objective, and to keep the strategic plans under review. Trustees and sponsors should take the opportunity to discuss and agree on the desired journey and endgame target for their scheme.

Ask: What is our long-term objective, and how does this valuation help us move towards it?

Linked to this, it’s important to recognise that the new regime retains flexibility, allowing for well-reasoned approaches, provided they are backed by evidence and sound judgement. It will be important to consider the new funding requirements, but it remains a scheme-specific regime very much.

For many schemes, focusing on strategy first and then making use of this flexibility to achieve compliance will make the most sense and ensure that the tail isn’t wagging the dog.

Understand at the outset exactly what you need to do, including what will need to be submitted to TPR

Especially for your first valuation in the new regime, it is essential to understand what will be required and when. This includes exactly what trustees will need to submit to TPR through the new “Statement of Strategy” at the end of the process (covenant-related information is the main area where this can vary considerably).

Importantly, the Statement of Strategy is not just a summary of assumptions and results – it includes a range of narrative disclosures and requires documenting key judgements. By starting early, you’ll be able to carefully consider these judgements and keep the submission process as efficient as possible.

TPR’s new regime offers potential simplification for:

• Fast Track schemes – those that meet pre-defined funding parameters,
• Low risk schemes – typically well-funded with minimal reliance on the sponsor, or
• Small schemes – those with fewer than 200 members.

Make sure you understand whether you could qualify for these easements early on, as that can help reduce the scope of covenant and investment analysis you need, and may simplify the Statement of Strategy.

Plan early, and plan well

Efficient valuations under the new regime rely on robust project planning. Trustees and sponsors should ensure that they have the right information at the right time and that advisers are coordinating effectively. Integrated risk management now plays a bigger role, meaning more planning and coordination is needed.

We’ve been providing training on the new regime to both trustees and sponsors – often in the same session. We’ve found this is a great way to start a valuation process, as a collaborative approach really helps to navigate the new requirements efficiently.

Consider covenant early

New covenant concepts and metrics play a much more central role in the new regime. Early covenant input is essential, particularly given the requirements to submit more covenant information than ever before to TPR. In some cases, significant detail on the covenant will need to be submitted in the Statement of Strategy.

Trustees will need to decide the period for which they have reasonable certainty over the employer’s cash flow to fund the scheme. This “covenant reliability period” will influence the funding and investment strategy and will drive recovery plan length where relevant. There are also new covenant tests which need careful consideration:

• The supportable risk test – does the employer covenant, and in particular the maximum level of contributions that the sponsor can afford, support the level of investment risk the scheme is taking?
• The reasonable affordability test – what level of contributions is reasonably affordable where a deficit recovery plan is required? This will usually be different from the maximum affordable contributions in the supportable risk test.

Understanding the difference—and applying the right test at the right time—is crucial. Remember that contingent assets can be useful to bridge gaps in affordability or risk tolerance. But there are complexities to be considered.

Read the blogs from our covenant team for more detail on what’s changed and the key covenant actions in the new funding regime.

The low dependency funding basis could be crucial

With legislation expected to allow surplus sharing above this benchmark, the low‑dependency funding basis set as part of a valuation could become a pivotal reference point. This means the low dependency basis merits careful consideration and communication, as in many cases neither trustees nor sponsors will have considered it in this context before.

Related to the low dependency funding basis, the new regime involves testing whether a low-risk investment strategy known as the low dependency investment allocation is highly resilient to investment market changes.  In our experience, strategies that appear low risk can fail the Regulator’s test. In such cases, it is important to consider the principles behind the test, rather than slavishly following the calculations.

Don’t underestimate the materiality of expense reserves

In many cases, the new Code will require schemes to hold a reserve towards future expenses.

For some schemes, especially smaller and more mature schemes, the expense reserve could be very material, and so taking advice on this early in the process will be important to avoid unhelpful surprises.

Some schemes need more consideration

It can be more challenging to apply the new requirements to some schemes. For example, the new covenant requirements were not written with not-for-profit or charity sponsors in mind. However, we know from our work so far that TPR has been constructive and flexible in its approach to considering the key new covenant concepts for these sponsors.

TPR has also offered welcome flexibility for open schemes.  This is potentially very helpful, but it does require additional judgements based on the covenant of the sponsor and its plans for continuing to provide defined benefit pensions for future service. 

Trustees and sponsors who take advantage of this flexibility, particularly if it results in a lower funding target than would apply to an equivalent closed scheme, will want to consider how they would bridge that gap in future if the scheme were to close.

And finally, there will be some schemes for which things just don’t add up because they are poorly funded and have a weak sponsor. TPR has acknowledged that this will be the case for some and that it is OK to be clear on that in the Statement of Strategy – noting trustees may then find TPR has further questions.

Above all, keep things proportionate

For well‑funded schemes, the new regime is likely to be more about formal compliance than substantive change. In these cases, trustees and sponsors should ensure advisers are taking a proportionate and pragmatic approach—and not over-engineering the analysis or advice.

While some schemes will require deeper analysis, most valuations should be able to proceed smoothly with a focus on proportionality.