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Financial resources

CDC code in force: 1 August 2022

To satisfy us that they meet the financial sustainability criterion, all schemes should have access to sufficient financial resources to meet the costs following a triggering event identified in their costs, assets and liquidity plan (CALP). The composition of these resources may be adjusted over time as the scheme grows and matures.

Available financial resources must be sufficient to keep a scheme running after a triggering event, while that triggering event is resolved, and if the scheme is wound up and members transferred out. The resources calculated should be broken into two separate strands:

  1. An amount sufficient to allow the scheme to continue to operate for a period of two years following a triggering event (the run-on period).
  2. An amount sufficient to cover the additional costs following a triggering event (the costs of compliance).

Run-on periodFA1

We can set the length of the run-on period and trustees should assume a runon period of 24 months. Trustees may be able to show that a shorter period is appropriate in some situations. When calculating the resources needed for the runon period, trustees should make reasonable allowance for variations in staffing or overhead costs throughout the period of the continuity option.

Costs of complianceFA2

The costs of compliance relate to the specific costs arising from a triggering event. In calculating the costs of compliance, trustees should, as a minimum, make allowance for:

  • additional spending on member communications
  • data cleansing
  • professional services, including actuarial, legal and accountancy advice
  • contract break clauses
  • staff termination or redundancy payments
  • contracting staff
  • additional work and communication from members who choose not to follow the default

Calculation of financial resourcesFA3

Trustees should consider the points below where their financial resources are met in whole or part by financial reserves. Trustees may also rely on legally enforceable guarantees from employers or group companies in lieu of maintaining financial reserves. In these situations, they should still consider the points below to ensure that the necessary support is always available.

In relation to financial reserves, trustees should:

  1. have first call on any assets held by or available to trustees to meet the costs, including any held by an employer for the schemeFA4
  2. be able to provide evidence that they have first call on the necessary support
  3. be able to access the necessary support if there is a triggering event of any type
  4. be able to show that any guarantor can provide the support they are committed to
  5. regularly review and adjust the value of the financial reserves they hold to account for their liquidity, scheme membership and demographics, and possible market movements
  6. be able to show that they have access to sufficient financial resources at all times
  7. perform their own prudent calculations of the costs arising from a triggering event
  8. base their calculations on what they calculate to be the more expensive of continuity options 1 and 2FA5
  9. expect us to ask additional questions about the assumptions used in calculations before we are satisfied
  10. calculate their required financial resources based on a triggering event occurring between three and five years in the future
  11. when deciding the forecast period, consider various factors including the growth and demography of scheme membership
  12. ensure any estimates are consistent with the figures used in their CALP
  13. regularly, and at least annually, revisit their calculations to ensure they contain appropriate cost estimates
  14. continuously monitor and maintain their forecast financial reserves

Legal references

FA1 Section 14(2)(b)(ii) of the Act

FA2 Section 14(2)(b)(i) of the Act

FA3 Section 14(2) of the Act

FA4 Paragraph 4(b) of Schedule 3 to the Regulations

FA5 We do not expect schemes to reserve for Continuity Option 3 (running as a closed scheme) until there is a prospect of this being a viable option

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