Trustees shouldn’t forget ‘the big picture’ before delving into the details of the DB Funding Code - LCP

LCP is urging trustees to focus on the overall picture before delving into the details of the DB Funding Code.

The Code has evolved significantly from where it started, and LCP has identified three areas from an investment perspective where there can be common misconceptions.

Myth 1: You will need to take action to get to a strong funding position quickly.

Reality: You’re probably already there, or if not, you’ve probably got plenty of time. 

• LCP analysis shows that two-thirds of schemes already have a surplus on a gilts + 0.5% pa basis. For many that haven’t reached that secure position yet, there’s ample time: only 10% may need to achieve low dependency within six years, while 40% have 15+ years to get there.

Myth 2: Once you reach low dependency, you should expect your assets to deliver low investment returns.

Reality: You have the flexibility to hold growth assets for the long term.

• LCP believes schemes can justify a long-term portfolio with a reasonable allocation to growth assets (eg 30%) – perhaps targeting an overall expected return of gilts + 1.5% - 2.0% pa.  In addition, trustees have full flexibility on how any surplus above full funding on the low dependency funding basis can be invested (eg it can be 100% equities).

Myth 3: The new funding code is all about scheme funding.

Reality: There’s also a big focus on other areas, including the liquidity of your investments.

• The new Code mentions liquidity over 60 times, with many sensible expectations on trustees regarding understanding the liquidity of the investments held, planning for unexpected cashflows, quantifying liquidity in stressed market conditions, and documenting protocols. Now is the ideal time for a liquidity health check to ensure assets are well-positioned and meet TPR’s expectations.

Jacob Shah, partner in LCP’s Investment team, commented: “It’s important to ensure the big picture is clear before trustees dive into the details of the DB Funding Code with their advisers. Given the origins of the Code, there are some possible misconceptions about what it actually means in practice, and some trustees may not realise the level of flexibility they have in setting their investment strategies.”

John Clements, who is also a partner in LCP’s Investment team, added: “In the short term, we recommend trustees carry out a high-level review of their journey plan, liquidity position, and alignment with the Fast Track requirements to help identify and address any potential issues early. Waiting until the valuation date could be too late.”