In the near future, UK defined benefit (DB) pension schemes face the prospect of two major proposed reforms, that look to radically change the funding and investment landscape - the DB Funding Code and the Mansion House reforms.

These proposals have a fundamentally different perspective on the direction of travel for DB scheme funding, the allocation of capital and investment risk. Building on the results of our recent FTSE 350 survey, in this blog we will investigate what these reforms could mean for UK DB pension schemes and their sponsors.

What are the reforms under consideration?

The first of the proposed changes concerns a potential overhaul of the funding regulations and the DB Funding Code. These changes have been many years in the making; the Pensions Regulator’s (TPR’s) first consultation on a revised Code was launched in March 2020 and built on the Department for Work & Pensions’ (the DWP’s) 2018 White Paper. 

A full summary of the proposed changes to the Funding Code can be found in our interactive briefing note, but, in short, the proposed changes will require schemes to target a low level of dependency on sponsors in the long run. This means schemes will have to adopt low-risk funding and investment strategies, with the aim of fostering long-term stability for members – in some cases, at the expense of higher costs to sponsors.

However, the Government is now also considering an altogether different approach to encouraging and/or requiring DB schemes to fund and invest. Referred to as the ‘Mansion House’ reforms (following the Chancellor’s recent Mansion House speech), the DWP has issued a call for evidence that is centred on the idea of schemes embracing greater investment risk by investing in “productive finance”. 

These proposals are designed to arrest – and reverse – the general long-term trend of UK DB schemes de-risking their assets as they mature (our data shows that the allocation of FTSE 350 DB scheme assets to growth assets has fallen from around 50% a decade ago to around 25% in 2022). The hope is that greater investment in productive finance will generate surplus returns that could be returned to sponsors and/or be used to improve member benefits, as well as benefiting the UK economy as a whole. 

In the analysis below, we consider the potential implications of these reforms for the FTSE 350 DB schemes, which includes some of the largest DB schemes in the UK. 

DB Funding Code – overtaken by events?

Firstly, we have considered how well placed the FTSE 350 DB schemes are to comply with the requirements set out in the draft new Funding Code. 

At the same time as introducing the new Code, TPR plans to adopt a new approach for how it assesses valuations. Specifically, TPR will introduce a “Fast Track” approach, which will effectively act as a regulatory filter on valuation submissions. Broadly speaking, the three Fast Track tests are based on: 

  1. a scheme’s funding level; 
  2. the length of any Recovery Plan (if the scheme is in deficit); and
  3. the amount of investment risk being taken. 

If a scheme is able to pass all of these tests, then TPR is unlikely to review the valuation submission in any detail. 

Our analysis suggests that around 80% of the FTSE 350 DB schemes are likely to pass all three of the Fast Track tests as at 30 June 2023. This is substantially higher than TPR’s own assessment that 51% of schemes would pass all three tests as at 31 March 2021, largely reflecting the significant improvement in average scheme funding positions over the past two years.

Of the remaining c. 20% of schemes which do not meet all of the Fast Track tests:

  • Some will make small tweaks to their current strategies in order to be able to go down the Fast Track route. Indeed, our analysis suggests that around 85% of the FTSE 350 DB schemes meet at least two out of the three tests.
  • Others will already be complying with the strict requirements of the Code, which are less prudent than the Fast Track tests, and opt for a “Bespoke” submission. Specifically, we estimate that around 90% of FTSE 350 DB schemes are already broadly compliant with the guidance in the Code.

This means that there is only a small minority of FTSE 350 DB schemes – around 10% – which will likely have to make major changes to their current funding and investment strategies in the event that the new Code comes into force.

This raises the obvious question: is the new Code really needed to change pension scheme behaviour? Given the material improvement in funding positions generally, much of the new requirements now appear superfluous for the vast majority of schemes. Therefore, will the additional costs of complying with the new requirements for all schemes outweigh any benefit that might be achieved by increasing security for a diminishing number of underfunded schemes? 

Mansion House – a huge boost for DB scheme sponsors?

The Mansion House proposals are far less fleshed out than the proposed changes to the Funding Code. At this stage, the DWP has just issued a call for evidence that covers various alternative approaches to DB scheme funding and investment at a high level. 

One of the central ideas in the call for evidence concerns making it easier to return surpluses to sponsors. We have focused on this aspect of the potential reforms, assuming that any surplus above 105% funding on a Fast Track low dependency basis would be available to be returned to sponsors. 

Given these assumptions, our analysis suggests that around £50 billion of surplus funds would currently be available to be returned to sponsors of FTSE 350 DB schemes if the Mansion House proposals are agreed. This equates to around 10% of the FTSE 350 DB scheme assets and is equivalent to around two-thirds of the total dividends paid in 2022 by the FTSE 350 DB scheme sponsors.

Of course, not all schemes will return surplus funds to sponsors (not least because the Mansion House reforms may come too late for some - many of the FTSE 350 schemes will already be in the buyout process with an insurance company). However, even allowing for this (and other issues like tax and potentially using some of the surplus funds to improve member benefits), it is clear that the Mansion House reforms could have a profound impact for sponsors of DB schemes. 


There is some tension between the new Funding Code and Mansion House reforms, though they are not necessarily incompatible with each other. 

Our analysis suggests that the Funding Code is unlikely to make a significant difference to how FTSE 350 DB schemes approach scheme funding and investment. This is partly because funding positions have improved significantly in the years since the revised Code has been in the works, and also because many schemes have decided to gradually align themselves with the draft guidance that has been well trailed by TPR. Is the Code therefore still needed?

On the other hand, the Mansion House proposals do have the potential to make a seismic difference to the pensions landscape. Our analysis illustrates the enormous levels of surplus funds in the FTSE 350 DB schemes that could be unlocked by the reforms. While clearly good news for sponsors, the reforms will need careful consideration to ensure that they also deliver for members and the economy as a whole, as hoped.

Currently, trustees and sponsors are in a difficult position. It is not clear how they can effectively plan for the long term when there are such vastly different reforms under discussion. While it is essential to get the detail of any reforms right, there is a risk of missed opportunities and sub-optimal decision making if clarity is not provided soon. 

FTSE 350 pensions: A year of transformation

Twelve months of seismic shifts have altered the endgame journeys of many of the biggest DB pension schemes.

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