Consultation on new rules for funding and investment of defined benefit schemes

20 October 2022

During a period of extraordinary events impacting the investment strategies of defined benefit pension schemes, the Department for Work & Pensions has been consulting on the draft Occupational Pension Schemes (Funding And Investment Strategy and Amendment) Regulations 2023, further to powers under the Pension Schemes Act 2021.


The key proposals are that:

  • from a “relevant date” unilaterally set, and varied at any time, by the trustees but no later than the date of “significant maturity”, i.e. broadly when the weighted mean duration of liabilities is 12 years;

all defined benefit schemes:

  • must use a “low dependency investment allocation” such that:
    • the cash flows from scheme assets is broadly matched with (expected) benefit payments; and
    • the value of the assets relative to the value of the benefit liabilities is highly resilient to short-term adverse changes in market conditions; and
  • be fully funded on a “low dependency funding basis”, i.e. one that uses a low dependency investment allocation and is otherwise sufficiently prudent that no further employer contributions should be required.

If the “relevant date” is a future date, all schemes must target full funding on the low dependency funding basis at that date and, in the meantime, link the risk level for both investment strategy and actuarial assumptions to the strength of the employer covenant and the scheme’s closeness to its relevant date.  Technical provisions for funding valuations and employer contributions must be set accordingly.

Employer covenant is defined as:

  • the financial ability of the employer to support the scheme; and
  • the support from legally enforceable contingent assets expected to be available when the scheme requires such support; and

is to be assessed by reference to deficit on the low dependency funding basis and the buy-out basis weighting these by reference to the likelihood of an insolvency event.


At high level, the proposals reflect the Pensions Regulator’s long-standing philosophy on linking the level of risk in investment strategy and liability (benefit) valuation assumptions to the employer covenant. 

The detail however may be dire for employers and creates its own risks. 

  • Trustees will be able to unilaterally force employers to fully fund deficits on a low dependency basis entirely from cash contributions and over a period set solely by the trustees.

This is a material change as current legislation generally requires the employer’s agreement to the funding basis and cash contributions and only allows trustees to set the investment strategy unilaterally.  The change is not flagged in the Pension Schemes Act 2021 but derives from the regulations for setting the relevant date.

  • Such “prudent” strategies, ensuring the worst case is covered, will drain resources from employers and create a high risk of trapped surpluses when market conditions reverse or the worst case does not materialise and membership experience is closer to mean.
  • In imposing a one-size-fits-all asset strategy for the £tn+ of defined benefit liabilities, market concentration risks will arise. Cashflow matching and asset liability matching strategies are limited and require investment and derivatives linked to the reference assets (gilts) used to value future pension payments.  The risks are particularly acute as these pension liabilities are largely maturing in step as they relate to one lucky generation of pensioners.

The public consultation invites responses on a number of specific questions.

Macfarlanes LLP’s response to the consultation is available here.