CDC code in force: 1 August 2022
Apart from a minimum amount for liquidity, we do not prescribe the assets that a scheme must hold in any reserves that it maintains. However, trustees must apply a discount, or ‘haircut’, to the current or book value of the assets held for reserving purposesFC1. The asset types set out in the table below are those we consider appropriate for inclusion in a scheme’s financial reserves.
The haircut modifies the present value of an asset or holding. For example, an asset with a current value of £100 and a haircut of 20% would be valued at £80 for the purposes of the financial reserves. This means that the current value of assets held by, or guaranteed to, the trustees in their financial reserves will be greater than that set out in the costs, assets and liabilities plan (CALP).
Trustees should choose the haircut that most closely represents each type of asset in their financial reserves. There are different haircut values for each class of asset, reflecting different levels of risk depending on the length of time before they are expected to be called on. Trustees should consider this when assessing the assets they hold in their reserves and the liquidity they require. The haircuts applied to assets may influence the choice of assets that the trustees include in their financial reserves.
Unless otherwise stated, we assume all asset prices are in pounds sterling. If they are not, we will expect trustees to have assessed the currency risk that the asset is exposed to, or to have included the costs of hedging activities in the CALP.
Schemes may hold their entire reserves in cash but should ensure that the CALP allows for the effects of inflation.
We will expect any debt instruments the scheme holds in its financial reserves to be of investment grade, as determined by a recognised ratings agency.
Financial commitments or guarantees issued by participating employers or group companies will be assessed for the ability of the relevant entity to support that commitment or guarantee, and the time that will be needed to deliver that support.
Schemes with financial resources covered by employer guarantees should aim to build their financial reserves to a point where they fully meet the financial resources they require. Trustees building their assets in this way should regularly monitor their progress towards holding their full financial resources.
| Asset class |
Description |
Haircut | |||
|---|---|---|---|---|---|
| Running costs | Financial reserves for costs rising |
||||
| Within 1 month of a triggering event | Between 2 and 12 months of a triggering event | >12 months of a triggering event | |||
| Scheme funds | Assets not attributable to members that are available to pay scheme costs | As underlying assets |
|||
| Cash | Cash including fixed-term deposits from eligible counterparties and money market funds | 0% | 0% | 3% | 6% |
| PRA regulated participating employer guarantee | Legally enforceable guarantees issued by a PRA-regulated participating employer or parent company which are not considered as debt instruments | 0% | 0% | 5% | 5% |
| Participating employer guarantee | Legally enforceable guarantees issued by participating employer or group company which are not considered as debt instruments | 0% | 25% | 10% | 10% |
| Scheme revenues | Revenues generated by the scheme from charges on assets (annual management charge) or members, based on most recent audited accounts | 10% | 10% | 20% | 30% |
| Scheme income | Income received from participating employers for covering costs, based on most recent audited scheme accounts | 10% | 10% | 20% | 30% |
| Government and public sector debt | Government debt (eg bonds, gilts), debt issued by central banks, government agencies, local government etc | 5% | 5% | 5% | 5% |
| Supranational institution debt | Debt issued by the European Investment Bank, World Bank etc | 10% | 10% | 10% | 10% |
| Corporate debt | Corporate bonds, including bonds issued by banks or credit institutions | 25% | 25% | 25% | 25% |
| Asset-backed securities | Bonds or notes backed by financial assets, excluding mortgage loans | 25% | 25% | 25% | 25% |
| Equities | Shares listed on a regulated market | 50% | 50% | 25% | 10% |
| Gold/precious metals | Certifications and bullion | 75% | 75% | 75% | 75% |
| UK government issued loans | Guarantees issued by government departments (eg the Department for Work and Pensions) which are not considered as debt instruments | 0% | 0% | 0% | 0% |
| Property assets | Scheme office premises or other property available on first call | 90% | 90% | 70% | 50% |
| Insurance | Policies held by trustees to cover normal scheme running costs | 0% | 0% | 3% | 6% |
| Wind-up insurance | Policies held by trustees to cover the costs of a triggering event | – | 90% | 3% | 6% |
| Loans | Loans provided by banks | 10% | 10% | 115% | 130% |
Legal references
FC1 Paragraph 4(a)(ii) of Schedule 3 to the Regulations