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Schroders Solutions’ response to the DB Funding Code consultation

On 16 December 2022, the Pensions Regulator (‘tPR’) published its second consultation on the proposed new defined benefit (‘DB’) funding code of practice (the ‘Code’). The consultation closed on 24 March 2023, and we summarise Schroders Solutions’ response to the consultation below. We expect the new code to apply to all funding valuations with an effective date from 1 October 2023.



Gerard Francis
UK Design and Strategic Risk ​

Our Key Observations

Many DB schemes are rapidly maturing. We support the overarching principle behind the Code to increase the security of members’ benefits as the time to recover from adverse events diminishes. Of course, for many schemes, this just formalises a framework they already have in place. But, for some, it will provide trustees with a powerful new tool when engaging with sponsors.

The regulations introduce a concept of ‘significant maturity’, which is a duration-based measure. tPR set the point of significant maturity when a scheme duration falls to 12 years. However, as yields rise (as we have seen over the past 12 months) scheme duration falls, bringing forward the point of ‘significant maturity’. Volatility in gilt markets creates volatility in this measure. tPR has acknowledged this issue and we look forward to seeing a solution to provide schemes with greater stability around this centrepiece of the proposed new Code.

Overall, we think that tPR’s challenge is producing a practical framework for smaller schemes whilst allowing larger schemes to show the benefits of high quality governance and risk management processes. We think this could be addressed by the code recognising the range of existing PPF tests.

Finally, the recent ‘gilts crisis’ demonstrated the potential for systemic risks if a significant proportion of schemes invest in similar assets. We believe there is a risk that the Code as drafted could exacerbate systemic risk and believe greater flexibility in the Code could help avoid it.

Principles are consistent with our existing approach to designing strategies

Overall, the principles behind the proposed new funding code appear reasonable and well aligned with Schroders Solutions’ existing approach to designing DB funding and investment strategies. For example, we have long been advocates of:

  • The investment strategy being an integral part of the triennial actuarial valuation process, rather than a separate exercise;
  • A journey plan making best use of covenant whilst trustees have the greatest visibility of it; and
  • A portfolio that evolves into a low-dependency portfolio as a scheme matures.

Limited ability to show the value of enhanced risk management

The Code includes several simplifications to ensure it remains practical for smaller schemes. These simplifications mean increased diversification and more sophisticated risk management techniques may not be fully recognised under the proposed regulatory framework. If schemes, and particularly larger schemes. perceive there to be limited regulatory benefit from better risk management, then there is the risk they may ‘level down’.

Schemes could address this using a mechanism that already exists. Rather than basing the framework on the PPF's simplified ('Tier 1') stress test parameters, the Code could allow schemes to use the PPF's more granular ('Tier 2' and 'Tier 3') tests, where appropriate. This would reward greater diversification and reduce the herding effect.

Over-simplification could create a systemic risk

Larger schemes pose the most systemic risk to both the PPF and the wider economy, with fewer than 350 schemes owning three-quarters of all DB pension scheme assets(1). We believe that the best way to manage this is to build a framework that focuses on the risks posed by these schemes and then find a practical way for smaller schemes to fit into this, rather than to build a simplified framework around ease of implementation for smaller schemes.

As tPR has done with DC (Defined Contribution) trust-based schemes, encouraging greater use of consolidation (perhaps via DB master trusts) is a practical way to achieve this whilst also improving outcomes for members, raising governance standards, being easier to regulate and facilitate greater diversification.

Code built around a ‘Gilts plus margin’ discount rate

Whilst the Code accommodates ‘dynamic discount rates,’ it is built around the ‘risk free rate plus margin’ approach. This creates the following challenges:

  • It reinforces the concentration of UK DB pension schemes in gilts and the use of LDI (Liability Driven Investment), potentially increasing the consequences of another ‘gilts crisis’ type event; and
  • It also decreases the incentive to use alternative investment strategies, which may be better suited to schemes in different circumstances. For example, Cashflow Driven Investment (CDI) strategies for schemes moving towards their low dependency target, or growth orientated portfolios for schemes still open to accrual.

This is particularly true under the proposed ‘Fast Track’ approach where, for example, it is not obvious how to align a dynamic discount rate with a ‘Gilts + 0.5% p.a.’ long-term target practically or systematically.

Our preference would be a framework that genuinely supports schemes looking to adopt the best investment strategy in their circumstances, when accompanied by appropriate risk management, rather than discourages it.


We welcome the principles behind the proposed new funding code, but schemes with good diversification and effective risk management should be recognised accordingly.

(1) The PPF Purple Book 2022, Figure 4.6

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Gerard Francis
UK Design and Strategic Risk ​


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