Scheme Funding
April 2021

How and why the Pensions Regulator harms businesses and DB pension schemes

Trustees, employers and TPR have different roles and objectives for funding and investing for DB Schemes.

Trustees represent the interests of scheme members and want to ensure all pensions are paid in full. If they can’t guarantee pensions, then they’ll want to fund and invest to maximise the probability of paying all pensions. At the same time, most trustees will recognise that the scheme was established by the employer to provide a benefit for its employees, and they’ll not want to harm the employer’s business.

Employers also want to make sure all benefits are paid in full. However, the DB pension scheme is only one of an employer’s responsibilities.  Employers will also want to provide benefits to employees who aren’t members of the DB scheme, control expenses, reinvest in the business and pay dividends to shareholders.

TPR’s key objective is to reduce the risk of calls on the PPF. This was the primary objective given to TPR under the Pensions Act 2004 and TPR is keen to ensure that schemes funding and investment plans minimise the risks of a claim on the PPF.

Trustee, Employer and Pensions Regulator DB Objectives

Different Objectives mean Different Funding and Investment Plans

As the employer, trustee and TPR each have different objectives for DB schemes, they may each want different funding and investment plans. The investment strategy that best meets the employer’s objective may not be the same as the one that suits the trustees, and neither may minimise the risk of calls on the PPF.

100% Funded On Self Sufficiency

To demonstrate this, let's consider a scheme that’s well funded. So well funded that the trustee and employer could, if they wish, invest wholly in gilts.

This is certainly what TPR and the trustee will want to do. As we explain here, a portfolio of gilts can be designed to cash-flow match pension outgo. Member benefits would be fully secure and there would be no risks to the PPF, and a 100% gilts strategy would allow both the trustee and TPR to meet their primary objectives.

The DB scheme sits within the employer's business and the employer will make good any experience losses and draw any surplus after all pensions are paid. The employer’s objective will depend on the shareholders views of the outlook for the various asset classes. Given the current low yields on gilts, some employers may decide it would be better for the business to maintain an allocation in growth assets, run down the pension scheme and draw surplus after all pensions are paid.

In summary, for a scheme that's 100% funded on self-sufficiency, the trustee’s and TPR’s objectives are aligned, but some employer's may have a different view.

100% Funded On Technical Provisions

Now consider a scheme that’s fully funded on technical provisions but in shortfall on a self-sufficiency basis.

To support the prudent funding assumptions, this scheme would have an allocation to growth assets. As the scheme is fully funded on a prudent basis, the employer is not obliged to make any contributions.

Most employers would be happy to continue running the scheme on this basis. They may be called upon to make good future experience losses, but as the scheme is funded prudently, the most likely scenario is that a surplus emerges over time.

The trustee would recognise that members’ benefits are still exposed to risk. In particular, the scheme is exposed to the risk of a sudden employer insolvency event.  As the scheme is not self-sufficient, the trustees may not be able to secure all benefits were this to happen. The trustee’s natural preference would be for more contributions to improve benefit security further. However, many trustees may accept that the employer has met its statutory obligations, and no contributions are required while the scheme is fully funded on technical provisions.  This is, in fact, the basis on which DB schemes have been funded for several decades.

Funding and Investment Strategy that best meets the Primary Objective
For most schemes a 100% gilts strategy would reduce the risk of a call on the PPF

TPR's strong preference would be for this scheme to invest 100% gilts. With a 100% gilts strategy, this scheme would no longer pose a risk to the PPF and TPR’s primary objective is met. If the scheme did invest 100% gilts, then as the scheme is in shortfall on a self-sufficiency basis, the employer will also need to restart contributions to ensure all benefits are eventually paid in full.

Why would a 100% gilts strategy eliminate the risk of a call on the PPF?

Recall that, because the scheme is in shortfall on a self-sufficiency basis, it does not have enough assets to secure full pensions by investing in gilts.

However, PPF do not pay full pensions to failed schemes. PPF pay non-pensioners 90% of their pensions, apply a cap on overall compensation and provide lower pension increases and smaller spouses’ pensions. On average the PPF may only provide 70% to 80% of full pensions by value.

As the PPF only provides 70% to 80% of full pensions, a scheme that's fully funded on technical provisions will likely have enough to secure the PPF level of compensation, even if it cannot secure full pensions. For this scheme, investing 100% gilts would allow TPR to meets its primary objective - even though 100% gilts may not be best for the trustees and employer.

In summary, for a scheme that's fully funded on prudent technical provisions, the trustee and employer may agree a reasonable allocation to growth and no contributions while the scheme remains fully funded. However this would leave the PPF exposed to risk, and there is every chance that TPR will push for ever larger allocations to gilts to eliminate the risk to PPF plus a restart of employer contributions. This is not academic. Scheme actuaries are already used to being pushed by TPR to adopt technical provisions that are at least as large as the PPF's Section 179 liabilities. It should not be a surprise that TPR also want schemes to adopt investment strategies that reduce the risk of claims on the PPF.

< 100% Funded On Technical Provisions

The parties differences are exacerbated for schemes in deficit with weak sponsors.

When conditions are tough, the employer’s overriding priority will be the survival of the business. Ensuring DB members receive full pensions even if the business fails (the trustees main priority) will be a secondary concern.

TPR will continue to favour a 100% allocation to gilts and LDI. Using leveraged LDI, allowance can be made for anticipated deficit contributions to invest 100% gilts and LDI to secure the PPF level of compensation. Without any connection to the employer, TPR will also favour shorter deficit recovery periods and other measures that would help is meet its primary objective.

How and why TPR harms businesses and DB schemes

TPR's actions most obviously harms businesses. So that TPR can reduce the risks of calls on the PPF, many employers are pushed into accepting ever more conservative investment strategies and prudence in the valuation assumptions. As a consequence, these employers may be paying more into their DB schemes than they are legally obliged to and diverting cash that could otherwise be reinvested in the business or returned to shareholders.

TPR’s actions can also harm scheme members.

In this blog we explain why pre-mature de-risking is not always in members interests, and that better pension outcomes can often be achieved by paying pensions from a diversified pool of investments, with de-risking delayed until after the funding the position has recovered.

The 100% gilts plus contributions strategy favoured by TPR to maximise the chance of paying 70% to 80% of pensions, is not necessarily the strategy that maximises the chance of paying 100% of pensions. TPR pressure on trustees and employers means they may be making decisions that are not in the best interests of their members.


As employers, trustees and TPR have different objectives, it follows that they will want different funding and investment plans.

It's important that trustees and employers continually review TPR’s guidance and annual DB funding statements so that they understand what TPR expects of them.  However, it's just as important that trustees and employers also take independent advice on the funding and investment strategies that best suit their own objectives.

This advice should be backed by strong quantitative evidence, so that trustees and employers can justify the decisions they've made and deal with any challenges from TPR.

Please contact us if you would like to discuss this