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Pensions Bulletin 2023/34

Pensions & benefits Policy & regulation

Pensions Regulator updates DC guidance

The Pensions Regulator has updated some of its guidance aimed at DC schemes so that it reflects new requirements and opportunities legislated for by the DWP earlier this year.

For scheme years ending after 1 October 2023, the trustees of certain DC schemes must disclose and explain, in that part of their statement of investment principles relating to their default arrangement, their policies on illiquid investment. They must also, in relation to the same scheme years, disclose and explain, in their annual Chair’s Statement, their asset class allocations for each of their default arrangements. And since 6 April 2023 such trustees have been able to exclude certain specified performance-based fees from the 0.75% charge cap.

The details for all of these were settled in January 2023, with the DWP issuing statutory guidance covering asset class allocations and performance-based fees. The necessary regulations came into force on 6 April 2023 (see Pensions Bulletin 2023/14).

The Regulator has updated three of its documents – the DC Code of Practice, DC investment governance and Communicating and reporting: DC schemes. Looking through each, the Code itself is unchanged (as Parliament needs to assent to changes), but the Regulator has simply added extra material ahead of it on its website under the heading of “Important” to introduce the three aspects covered by the 2023 regulations and statutory guidance. The Code itself has been out of date for some while with this section also covering changes made under 2018 regulations.

The DC investment governance document now usefully reflects the illiquid investment and performance-based fees aspects of the 2023 regulations. The Communicating and reporting document has had slight adjustments made to it, including the briefest of mentions of the important asset class allocation disclosures now required by the 2023 regulations.


This is a patch and mend job by the Regulator whilst it continues to wait for the Government to let Parliament see the Regulator’s General Code that will replace the DC Code of Practice and nine other codes. This latest update does the bare minimum to reflect the 2023 regulations and statutory guidance. Hopefully, we won’t have much longer to wait until the Government lays the General Code before Parliament.

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PPF issues its third TCFD report

The Pension Protection Fund has published its latest annual Climate Change report, disclosing the climate-related risks and opportunities in its investment approach, in line with the Task Force on Climate-Related Financial Disclosures guidance, with an aim to build understanding of the impact climate change has on the Fund.

The report was produced to progress transparency of climate-related financial information. This includes reporting the risks and opportunities presented by rising temperatures, climate-related policy and emerging technologies in the changing world.

Amongst other things, this year’s report (for the year ending 31 March 2023) highlights that 11% of the Fund is now allocated to investments categorised as “Aligned” with Net Zero (from 4% in the 2020 baseline assessment), whilst the percentage of the Fund’s equities portfolio allocated to companies who have set or committed to a science-based emissions reduction target increased by a third to almost 43% from 2021.

The information set out in the report has required a lot of effort on the PPF’s part, with the PPF saying that in the past two years it has gathered climate assessments across every investment in the Fund so it can see how the Fund’s position aligns to Net Zero and the Paris Agreement.


This report shows steady progress being made across the PPF’s investment portfolio on such measures as implied temperature rise and carbon emissions, but there remain significant areas of the portfolio where further reductions are needed.

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Pensions Regulator responds to concerns about usefulness of climate change scenario analysis

Mark Hill, Climate and Sustainability Lead at the Pensions Regulator, has written a blog centred around recent challenges to the usefulness of current climate change models and scenario analysis that trustees of larger pension schemes are required to use in their climate reports. These challenges, including in a recent report by the Institute and Faculty of Actuaries, have come at an important time in the roll-out of TCFD reporting by larger pension schemes, with around 90 schemes having published their reports by 31 July 2023 and a further 180 schemes expected to publish their reports by 6 November 2023.

Whilst not disputing these challenges, Mr Hill calls on trustees to fully embrace climate change risks in their thinking, setting out a list of things that trustees should do, and asks trustees not to regard their TCFD reporting as a tick-box compliance exercise. Instead, they should work towards making their scenario analyses ‘decision-useful’ for risk management purposes through using models and scenario analysis that “addresses a fuller range of real-world risks and uncertainties”.

For those who have yet to publish their report Mr Hill says that where the scenario analysis is complete but the TCFD report has not been finalised, it would be useful if trustees provided additional commentary in the report on the analysis they have carried out and how they expect it to develop. Where the report has been finalised, he suggests that additional comments could be made in trustee board minutes and made available to members.


Measurement of climate change risks on a consistent basis, as provided for through TCFD reporting, is one thing. Addressing the systemic risk posed by climate change is another. On the first aspect, the Regulator is right to highlight that financial modelling of climate change risks is at an early phase, with the possibility that some models are underestimating these risks. And whilst measurement is useful, mitigating action, to the extent that it is possible, is far more important.

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Actuaries examine capital backed funding arrangements

A paper, produced for the Institute and Faculty of Actuaries, and to be presented at a meeting on 14 September 2023, looks at developments in capital backed funding arrangements, which are an alternative risk transfer solution for defined benefit schemes to the traditional buyin and buyout with an insurer.

The paper defines capital backed funding arrangements as “agreements which offer a particular investment return or financial outcome for a defined period, backed by third-party capital which underwrites this commitment. The existing sponsor remains adhered to the scheme”. In essence, capital is introduced by a third party, for a limited period, in order to support the trustees’ scheme funding journey, such as to full buyout. That capital clearly comes at some cost, but it may offer greater certainty than the traditional DIY journey that can be thrown off course if certain downside risks materialise.

The paper goes on to: survey the current scheme funding landscape and consider the need in this environment for arrangements to support scheme funding journeys to deliver benefits in full; summarise the key features of arrangements in the market that may support these objectives; discuss how these arrangements could meet scheme and sponsor objectives; and set out considerations for trustees and sponsoring companies when assessing these arrangements.

The paper concludes that capital backed funding arrangements can offer tangible benefits for DB schemes to secure member benefits in full, listing downside investment protection, covenant improvement, access to investment expertise, governance arrangements and potentially assistance to prepare for an insurance buyout or a low dependency strategy. However, it goes on to say that there are new risks to consider and that it remains a relatively new area with limited standardisation or information in the public domain. It is important for trustees to understand how an arrangement works both in the normal course of events, in periods of stress and if the arrangement is terminated.


This is an interesting introduction to the subject, on which we would hope to hear more from the Pensions Regulator, especially when it finalises its new Funding Code, hopefully sometime this autumn.

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