Annual Funding Statement 2023

Key messages

Most schemes have improved funding levels through a combination of investment out-performance from return-seeking assets and a significant rise in gilt yields. Many are expected to have exceeded buyout funding levels. Trustees will need to consider if their long-term targets remain appropriate, whether buy-out is viable, or to examine other endgame options.
If funding levels have improved significantly, for example because of an unhedged position against interest rates, trustees should consider whether continuing with the existing strategy and level of risk is in the best financial interests of their members and beneficiaries. If not, they should seek applying some of the funding gains towards a less risky funding and investment strategy designed for a smoother and more predictable transition to the long-term target.
Funding levels will have fallen for a small number of schemes, including some schemes invested in pooled funds and others unable to meet the necessary liability driven investments (LDI) collateral calls when gilt yields spiked in 2022. They will need to reset funding and investment strategies to reach their long-term targets and should review their operational governance processes to ensure future resilience. Trustees, their investment managers and advisers should read our LDI guidance for more information.
The level of risk that trustees decide to build into their scheme’s funding and investment strategies should be supported by the support available from the employer covenant. It is important to avoid complacency when monitoring the employer covenant, ensuring effective information sharing protocols are adhered to, and assessing the impact of any changes. Trustees should consider obtaining independent specialist advice to help them, particularly where the covenant is complex or deteriorating, or if it has been materially affected by recent market events.

Introduction

This statement is for trustees and sponsoring employers of occupational defined benefit (DB) pension schemes. It sets out specific guidance on valuations under current conditions, particularly for schemes with valuation dates between 22 September 2022 and 21 September 2023 (Tranche 18, or T18), as well as schemes undergoing significant changes that require a review of their funding and risk strategies. It also applies to schemes that may be receiving requests for reduced contributions, amendments to contingent asset arrangements, and proposals for other uses of surplus.

Approximately 25% of T18 valuations will take place at dates around 31 December 2022, and a little over 50% at or near 31 March 2023. Our analysis indicates that, at both dates, the aggregate funding level for all T18 schemes was ahead of that expected three years previously. However, the position for individual schemes will vary greatly compared with aggregate estimates and depend on scheme-specific factors, including hedging levels.

The analysis supporting this statement will be published shortly.

We will regulate all T18 valuations according to the requirements of the existing legislation and guidance in force at the date of the valuation. We have a statutory objective to protect people’s savings in workplace pensions and one way we do this is by ensuring DB schemes are appropriately funded and the level of risk is supported. This will enable schemes to meet the benefits promised to members.

The current funding regime (as set out in Part 3 of the Pensions Act 2004 and our current DB funding code and guidance) applies until the new legislation (Pension Schemes Act 2021 and associated regulations) and our revised DB code comes into force.

General considerations for schemes currently undertaking a valuation

DB schemes have seen significant changes over the last year. The substantial spike in nominal and index-linked gilt yields in September/October 2022, on top of the gradual rise throughout the earlier part of the year, was a significant turning point for most DB schemes. The speed and magnitude of the decreases in assets and liabilities of schemes will have surprised many. Long-term objectives set in an era of low interest rates, and their associated funding and investment strategies, may now need to be reviewed.

Employer covenants may appear proportionately stronger given reduced scheme sizes, but they may also have been impacted by high inflation, low economic growth, high energy costs and higher borrowing costs. Contingent assets such as guarantees, escrow accounts, and asset-backed funding arrangements expressed in nominal amounts may also now look more favourable.

Funding positions of all but a minority of schemes should be ahead of plan and a significant number are expected to have exceeded buy-out funding levels. Trustees will need to consider if their long-term targets remain appropriate, whether buy-out is viable or to examine other end-game options. Some schemes will also be facing calls from employers for reductions or suspensions to contributions, as well as from members for discretionary increases, given that pension increases may not have kept pace with inflation. When considering such pressures, trustees should be mindful of their overall position, the resilience of their investment strategy to future financial market movements and the level of covenant support.

For a minority of schemes, funding levels will have fallen, including some schemes invested in pooled funds and others unable to meet the necessary LDI collateral calls, and may have experienced a reduction in hedging levels during the gilt yield volatility in 2022. They will need to reset funding and investment strategies to reach their long-term targets and should review their operational governance processes to ensure future resilience, in line with our LDI guidance.

Open schemes may have also seen a material reduction in the estimated cost of providing future service benefits and, given their immaturity, many have seen larger movements in funding levels. Trustees are likely to be more focused on technical provisions (TPs) compared to long-term targets/end-games, and may be maintaining greater covenant reliance for a longer period than their closed counterparts. While the trustees’ immediate objectives may be different to closed schemes, the principles outlined later in this statement should still prove useful in helping trustees to consider what actions to take in response to the market conditions and improved funding levels.

While most trustees should be approaching T18 valuations from a relatively healthy funding position, they should recognise the economic uncertainty that will continue to impact investments and employer covenant in different ways, including:

further increases in interest rates, which could affect the scheme’s assets and liabilities, as well as increasing borrowing costs for the employer, potentially making refinancing more difficult
high rates of inflation and their knock-on effects on pension scheme liabilities and investment returns, as well as their effect on other employer costs (such as raw materials and operating costs), which they may not be able to pass onto customers
volatile commodity and energy prices affecting profitability of employers and fuelling inflation in the wider economy
the potential for ongoing or new geopolitical instability and/or conflict to affect supply and distribution chains or cost bases of employers

As always, it is important to satisfy yourself that your long-term target remains appropriate and your funding and investment strategies are aligned to it. You must act in the best financial interests of your scheme members and their beneficiaries, and the scheme investments should generate returns that enable the scheme to pay promised benefits as they fall due. Your scope for risk-taking will depend on the maturity of your scheme and the support available from the employer to underwrite risk.

You should understand your key risks and the effectiveness of your plans to manage them. Risks are often connected by the same underlying factors, for example higher inflation and interest rates which affect the scheme’s funding level may also influence the employer’s ability to provide contributions and support risks.

The effects on assets, liabilities and covenant may be different in the short and long term and should be considered in an integrated way. Scenario planning provides insights into strategic de-risking, journey planning and contingency plans.

The remainder of this statement sets out further guidance which should enable you to focus on key elements of your funding plan. This includes our views on requests to reduce or cease the payment of deficit repair contributions (DRCs) or amend contingent assets, and on how to address situations where the covenant support may be materially affected by the employer’s refinancing requirements.

Re-thinking strategies: funding positions

Our analysis shows most schemes have improved funding levels through a combination of investment out-performance from return-seeking assets and a significant rise in gilt yields.

Our analysis shows that around a quarter of all DB schemes may now have sufficient assets to buy out their liabilities with insurance companies. They will need to consider whether to execute any previously agreed end-game plans or develop other options. Many of the remaining schemes are estimated to have funding positions that are currently ahead of their funding plans, and in many cases ahead of their TPs. For them, this may be the trigger to review their pace of funding and level of risk-taking or to re-consider their longer-term objectives and set new more ambitious targets.

However, the funding levels for a minority of schemes are estimated to have fallen. We believe these are largely schemes that were unable to meet the necessary collateral calls, had their hedges reduced or taken away altogether and subsequently suffered losses as markets turned against them.

Depending on which group your scheme falls into, our specific guidance to you is as follows:

Group I: Where funding level is at or above buy-out

If you now have sufficient assets to buy-out your liabilities with an insurance company, your scheme rules may give you some guidance and you may need to take advice and consult the employer. Among other things, you will need to consider whether proceeding with an actual buy-out, either outright or in stages is the best way to lock in funding gains.

You may consider that running on the pension scheme is a better option for your members, as it offers them potential to benefit from future surpluses. Your employer may also have concerns over trapped surpluses or prefer an ongoing arrangement allocating some surplus to fund scheme expenses, future accruals or, depending on the legal structure of your scheme, to benefit members in a DC section. However, running on a scheme involves some investment risk, as well as other risks from longevity, scheme administration and expenses of a long run-off. You may mitigate some of this risk by creating a specific risk buffer using some of your surplus.

If buy-out is your preferred route, you will want to put yourself in the best possible position to approach the market. The buy-out market has limited capacity and if you are unprepared you might struggle to secure a provider, face a lengthier transaction process, and have to pay a higher premium.

Your investments should be in assets preferred by insurance companies, and de-risked to minimise ongoing risks to members and the employer. Your investment adviser will be able to advise you on this. You should also work with your administrator to ensure that you capture the data buy-out providers require and put in place a plan to improve this data if necessary. You can find out more about buy-out data in The Pensions Administration Standards Association’s guidance.

You should recognise that this can be a lengthy process, often stretching over years. If this is likely to be the case, you should ensure that your favourable funding position remains resilient to future market movements and that your dependency on the employer remains minimised.

Capacity issues in the insurance market could also mean that your scheme is too large or too small for a viable buy-out in the short term, in which case you will need to consider other options to protect the improved funding position. There may be other reasons why you may decide that a buy-out is not the best course of action for you right now. For example, you may consider a stepped approach involving a partial buy-out or a buy-in to be more appropriate. Or you may decide that the terms on offer in the insurance market are not sufficiently attractive and other alternatives are worth investigating.

Whichever option you choose, you may need to take advice about the risks and benefits of doing so, and your duties in this regard. You should ensure that you have a sufficient understanding of any new models or options you are contemplating, including areas where you may be transferring control over key decisions to third parties. You should also be clear about the key risks within your chosen option and put in place suitable strategies to mitigate them.

Group II: Where funding level is above technical provisions but below buy-out

Like most schemes, you may have agreed with the employer a long-term objective and a timescale for reaching it. You should consider whether the objective remains appropriate. You may also have plans to gradually transition your investment strategy to align with that in the long-term objective, with triggers for action as your scheme funding improves or the scheme matures. Exceeding your TPs should trigger further actions to keep the scheme on the path to the objective, like strengthening the TPs and reducing the risk in the investment strategy. If you experienced a significant improvement in your funding level over the last year you should consider accelerating this process.

It would be good practice to consider the steps you can take now to align (even if broadly) with the key principles of the draft funding code, particularly those underpinning the definition of the low dependency funding target, investment allocation and funding basis (see Chapters 3 and 4 of the draft funding code).

If you are well on your way to reaching the buy-out funding level and this is your end-game strategy, then you should consider getting ‘insurance ready’ (see the guidance above for Group I).

If you haven’t agreed a long-term funding target (LTFT) yet, you should do so as a priority. The direction of travel in the draft funding code should help you decide on an appropriate LTFT and a method for reaching it, including the broad timescale and the pace of de-risking. If you then find that your funding is already above your chosen LTFT, you should consider reducing your ongoing reliance on the employer and improving security for your members (the principles set out in the draft funding code will be a good guide).

Group III: Where funding level is below technical provisions

If your funding level is below TPs, your focus should be on bridging this gap first. You should re-visit your TPs to ensure that they are aligned to your LTFT. Your risk-taking should be supported by the employer covenant and should reduce as the scheme gets better funded or matures. Any deficit should be recovered as soon as the employer can reasonably afford. Our guidance from previous years applies and is repeated in the accompanying tables with minor amendments. How you balance the relevant factors will depend on the nature and circumstances of your scheme, as well as your recent experience. For example:

if your funding level showed a steady and expected improvement over the past year, then you may consider that your strategy is working according to plan and can continue with minimal change if the employer’s covenant remains appropriate
if your funding level improved significantly, for example because of an unhedged position against interest rates, you should consider applying some of the funding gains towards a less risky funding and investment strategy designed for a smoother and more predictable transition to your LTFT

If, on the other hand, your scheme happens to be one of the minority whose funding position regressed significantly over the past year, you should seek to understand the reasons for this. You should then re-build an appropriate funding and investment strategy from where you are.

You should also review your operational governance for investment management in line with our LDI guidance.

Re-thinking strategies: investment considerations

The key change in market conditions in 2022 was the rise in long-term global interest rates, which meant that bonds performed poorly compared to equities, specifically in the UK.

This will mean that for many schemes, their current asset allocation may be materially different compared to where it was expected to be, and their investment strategy will need to be reviewed in light of current scheme funding. You should consider the implications for your investment strategy, particularly the split between matching and growth assets. It may be that you need lower returns from your investments in the future, so de-risking is likely to be a consideration, including the following:

Selling growth assets such as equities for bonds and other cashflow matching type assets to increase the interest rate and inflation matching of your assets to liabilities.
Reducing leverage in geared LDI arrangements.

De-risking will depend on funding level improvements and forward-looking objectives. For example, immature and open schemes that have seen significant funding level increases could have a wide choice of strategies available, including retaining higher levels of risk compared to more mature schemes, as well as potentially having opportunities to reduce risk.

Operational risks were highlighted by market events in 2022. The gradual rise in real and nominal gilt yields was an initial test of schemes’ operational processes for collateral payments into leveraged LDI funds, and these were tested further when gilt yields rose quickly and significantly in late September and October. Trustees should refer to our recently issued guidance on using leveraged LDI.

Trustees may have found that illiquid assets are a greater proportion of scheme assets than originally envisaged. This will particularly be the case where there was a material level of LDI or bonds in place. These factors combined with others suggest the demand for illiquid assets may have fallen and the desire to sell has increased. Therefore, trustees should speak with their advisers about managing illiquid assets given the significant change in market conditions.

In these discussions, the following factors should be considered:

What are the illiquid asset exposures compared to target?
What confidence do the trustees have in the valuations?
Does holding illiquid assets align with wider objectives and cashflow requirements for the scheme, whether this is to buy-out scheme liabilities or run the scheme off?
Should the illiquid asset exposures be retained or sold down?
- If they are retained, what are the longer-term plans?
- If illiquid assets are to be sold down, what is the process for selling, what costs could be incurred and what valuations could be achieved?

Re-thinking strategies: covenant consideration

If your funding level improved over the last year, you may currently appear less reliant on the employer covenant. However, in volatile economic conditions this can change quickly if your investment strategy is not resilient to market changes or because the health of the employer’s business deteriorates. You should remember that your scheme will remain intrinsically linked to the employer up to the point your end game is reached. Scenario analysis of different economic environments and their impact on funding positions should help you understand your scheme’s sensitivity to changes and how quickly covenant dependency can increase.

You should not overlook the short-term impact of the current economic environment on the employer covenant either. Higher interest rates could translate to higher borrowing costs for your employer. When added to higher energy costs, potential reduction in demand and the effect of higher short-term inflation on input costs and operational expenses, short-term affordability and support for risk-taking may be constrained. You should therefore understand the key factors affecting your employer’s resilience.

You may consider it appropriate to amend the scope of the covenant assessment supporting your scheme, especially where there has been a large movement in the funding position. For instance, covenant assessment could be less focused on uses of free cash flow if no recovery plan is required, and more on the longevity of the covenant and the potential impact of environmental, social and governance (ESG) risks.

Your sponsoring employer should continue to provide you with financial projections and business plans to enable you to properly assess their covenant. Ongoing trading volatility means it may be difficult to test management’s forecast assumptions against prior year performance, emphasising the importance for you to engage with management to understand their forecasts and the key challenges.

It is important to avoid complacency when monitoring the employer covenant, ensuring effective information sharing protocols are adhered to, and assessing the impact of any changes. You should consider obtaining specialist advice to help you, particularly where the covenant is complex or deteriorating, or if it has been materially affected by recent market events.

If you are the trustee of a small scheme, cost-effective professional advice may not always be readily accessible. A strong source of information should be the company’s management, and open and ongoing sharing of information will be fundamental to responding to the current economic environment.

If your sponsoring employer is experiencing corporate distress or acute, near-term affordability restrictions, you should refer to our guidance on protecting schemes from sponsoring employer distress.

Other considerations

Longevity

Over the last few years, primarily due to the impact from the COVID-19 pandemic, mortality data has not followed past trends (particularly in 2020 and early 2021). There are differing views on what this may signal for appropriate longer-term mortality assumptions for pension schemes. However, industry commentators, along with the Continuous Mortality Investigation (CMI), have noted that over the last year and a half mortality has begun to stabilise at a rate higher than in 2019 (pre-pandemic).

Mortality in 2022 onwards may be more indicative of future mortality than previous years, and if so, this may suggest lower future life expectancies. However, this still needs to be interpreted with care and a degree of caution, but it will take time to see the new trends develop.

We expect many trustees will be revising their mortality assumptions after taking advice from their scheme actuary. When doing so, as usual, they should ensure changes to their mortality assumptions are appropriate and justifiable.

Inflation

In last year’s Annual Funding Statement, we noted some of the challenges current high inflation rates will have on the calculation of benefits and benefit increases built into valuation calculations, and in deriving assumptions such as salary increases. We also noted the planned alignment of Retail Prices Index with the Consumer Prices Index including owner-occupier housing costs, from 2030.

Our views on these remain unchanged (see the AFS 2022 — Inflation section).

Revising recovery plans and contingent assets

If you are ahead of plan and considering whether to reduce or stop DRCs as part of an actuarial valuation, we expect you to first consider the following:

If your covenant has weakened, or was already weak, you should ensure that the level of prudence in your TPs remains appropriate and the level of investment risk is supported by your current assessment of the covenant.
If you have a TPs deficit, you should consider reducing the remaining length of the recovery plan before reducing the level of DRCs. This is particularly important if the recovery plan remains longer than six years, or your scheme is mature or there are concerns about the longer-term ability of the employer to support the scheme.
If your recovery plan makes an allowance for asset returns in excess of the TPs assumptions, you should first consider reducing the additional risk from this before reducing DRCs. This particularly applies if your investment strategy has recently been de-risked and TPs have not been amended to take account of the lower expected returns from the new investment strategy.
If shareholder distributions exceed DRCs or covenant leakage is material, it is unlikely to be appropriate to reduce DRCs while a TPs deficit persists (see the AFS 2020 — What we expect of trustees section).

If a request is received to reduce or stop DRCs outside of a formal actuarial valuation, we still expect you to work through the considerations above. In addition, we strongly encourage you to put in place a mechanism to ensure that contributions recommence if there is a reversal in the recent funding level gains.

If your employer is showing signs of distress and requests a reduction, deferral or cessation of contributions to support liquidity, and if providing such support is considered appropriate, we expect you to obtain suitable mitigations (see the AFS 2021).

If the assets and liabilities of your scheme have reduced, any contingent assets defined in nominal terms that support your scheme may now appear proportionately more favourable. If your funding position has also improved, your employer may seek to renegotiate the terms of the contingent arrangements to free up assets for their use. We expect you to evaluate any such proposal critically, and understand the value being given up against a range of reasonable scenarios. If you then conclude that the changes are not detrimental to members, we encourage you to make provision for the protections to be revised upwards in future, should the funding position subsequently deteriorate.

Assessing refinancing risk as part of covenant assessments

Interest rate increases and tightened risk appetites of lenders may result in materially changed terms and conditions when existing debt facilities require refinancing. Employers that are highly leveraged or in a weaker financial position are likely to be affected more.

Re-financing risk should be incorporated into your covenant analysis and information sharing agreement and monitoring, as it may impact future covenant support, potentially place more restrictions on management’s actions, and affect the scheme’s position as a creditor. How you do that will depend on the expected timing of the refinancing.

Where the refinancing is expected to be well progressed prior to the completion of the valuation, you should already be fully engaged in the process. Our recent post on our blog sets out our expectations on what you should consider. We do not expect you to finalise your covenant analysis until the terms of the refinancing become clear and they can be fully factored into your covenant conclusions.

Where refinancing will fall after the valuation date but still within the short term, for example within three years, you will need to consider how it could affect future covenant support. This will include the following:

Engaging with company management to understand the options and timetable for refinancing. For example, options might include extending existing facilities, refinancing using a similar facility or looking at a wider range of financing options which could change the debt structure.
Ensuring potential changes in interest rates are factored into management forecasts based on current market conditions.
Understanding management contingency plans if refinancing is difficult. This is especially important where the employer is highly leveraged or if there are signs of financial distress. Contingency plans could include actions to reduce debt levels by asset sales, sale and lease back agreements or additional funding from supportive shareholders.
Keeping open communications with management, documented through an information sharing agreement to ensure timely information is provided. Understanding forecast headroom on banking covenants is important and should be incorporated into covenant monitoring.

What you can expect from us

DB funding code

Our second consultation on the draft code and approach to Fast Track, published on 16 December 2022, closed for responses on 24 March 2023. We have been keen to ensure stakeholders have had ample opportunity to engage with and input into our proposals as they have developed. We will now carefully consider responses to our consultation and the final regulations from the Department for Work and Pensions as we finalise the code and will continue to engage closely with stakeholders throughout this process.

Our main focus is to ensure there is sufficient time for us and industry to prepare for the new requirements coming into effect. We now expect the Regulations and revised DB funding code to come into force at the same time in April 2024. The existing code and guidance remain in place until the new legislative requirements and the new code come into effect (these changes will apply to schemes with valuation effective dates on or after the commencement date). We will consult on the information we plan to collect through the statement of strategy and related guidance in due course.

Updated guidance for covenant assessments

In conjunction with our updated DB funding code, we plan to set out our proposed changes to our August 2015 guidance on Assessing and Monitoring the Employer Covenant and other related guidance later this year. We intend to provide more detail on covenant visibility, reliability and longevity, how to treat guarantees for scheme funding purposes and more information regarding ESG risks and how these can be factored into the covenant. We will also outline various examples to support trustees in understanding how to apply any updated guidance.

Where sponsoring employers are in distress

The current and emerging macro-economic environment may challenge employers and the pensions industry. Trustees are the first line of defence for savers and their pension schemes, and it is vital that they remain alert, prepare, plan and are ready to act as needed.

We will be engaging with schemes if we have concerns over corporate distress, to ensure they are following our guidance.

When regulating Tranche 18 valuations

Our Supervision teams will risk assess valuation submissions we receive in a proportionate way. These risk assessments look at the overall risk profile of a scheme relative to the ability of the employer to support it. It is therefore important that trustees and employers are fully aware of our expectations in this statement and in our wider guidance. Trustees and employers should be fully prepared to justify and explain their approach with supporting evidence.

Our powers

Our suite of powers includes the scheme funding power to direct how a scheme’s TPs should be calculated and how (including over what period) its deficit should be funded. We can use this power when there has been a failure to agree or when the valuation assumptions or recovery plans do not appear good enough to meet the standards required by law. For more information, see our funding code and guidance relevant to the date of your valuation.

We can often achieve appropriate outcomes without using this power. However, we may investigate where we believe trustees and/or employers have not acted in line with our expectations set out here, and in our relevant policy statements, guidance and codes of practice.

Key risks and our expectations

The table below should assist trustees in matching their specific scheme circumstances with our expectations.

Select the page number of your group below to be taken to your specific group table.

In each of the tables, which can be accessed via the links in the table below, we have identified the key risks we expect you to focus on, and features of the funding plans we expect you to develop, depending on your scheme and employer characteristics. Our feedback from trustees and advisers is that this approach has been helpful in guiding trustees to develop their plans. Our guidance from earlier years on the key long-term risks remains relevant for T18 valuations and is reiterated in the tables which have been updated to reflect the current market environment and generally improved funding positions.

You should first determine the strength of your current funding position relative to your long-term plans. Although you are not required to do so yet, we encourage you to consider the general direction of travel in the draft DB funding code and set your long-term funding target (LTFT) accordingly. You should make an assessment of the strength of the employer covenant and understand broadly where your scheme is in the maturity spectrum (open schemes should generally be at the immature end of this spectrum). This will enable you to find the table closest to your circumstances, which should help you determine the direction and magnitude of change to your funding and investment strategies, the risks you need to focus on, and the actions we expect. You should then set about preparing your recovery plans to balance affordability with other reasonable uses of cashflow for the employer.

These tables are not intended to be exhaustive for each category, nor are they a substitute for reading the Annual Funding Statement or taking independent professional advice.

Find your group

Employer strength	Strong/tending to strong employer				Weaker employer with limited affordability				Weak employer unable to provide support
Funding characteristics	Funding level on track to meet LTFT or ahead		Funding level behind plan and/or		Funding level on track to meet LTFT or ahead		Funding level behind plan and/or		Stressed scheme with limited or no ability to use flexibilities in funding regime
	TPs strong		TPs weak and/or		TPs strong		TPs weak and/or
	RP shorter than six years		RP longer than six years		DRCs reducing deficit at affordable pace		RP longer than six years
Maturity	Immature	Mature	Immature	Mature	Immature	Mature	Immature	Mature	Immature	Mature
Group	A1	A2	B1	B2	C1	C2	D1	D2	E1	E2

A1 table

What we expect from trustees and employers
Group	A1
Characteristics	Strong or tending to strong covenant. Scheme’s funding position is on track to meet the LTFT or ahead. TPs are strong and recovery plan is shorter than average (less than six years). Scheme is relatively immature.
Key risks	Employer exposed to market risk if scheme is not cash flow matched/hedged. Covenant weakens at the same time as investments underperform. Lack of long-term covenant visibility and possibility of sudden material covenant deterioration. TPs may not be aligned to the scheme’s LTFT.
Covenant	Where there is a high level of covenant leakage, consider proportionately increased DRCs and shorter recovery plans. Proportionate covenant monitoring. Understand longer term risks including ESG factors. Clear IRM strategy, with realistic contingency planning for key downside risks.
Investment	Set a long-term asset allocation consistent with the scheme’s LTFT. Establish a journey plan to move towards the long-term asset allocation. Review the LDI strategy and assess it for operational resilience — see our recently issued guidance. Quantify the impact on funding of adverse investment performance. Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
Funding	Agree your ultimate goal for the scheme and set a consistent LTFT. Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale. Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT. If concerned about risk of trapped surplus, consider using escrow, ABCs, and contingency planning.

A2 table

What we expect from trustees and employers
Group	A2
Characteristics	Strong or tending to strong covenant. Scheme’s funding position is on track to meet LTFT or ahead. TPs are strong and recovery plan is shorter than six years. Scheme is relatively mature.
Key risks	Employer exposed to market risk if scheme is not cash flow matched/hedged. Covenant weakens at the same time as investments underperform. Lack of covenant visibility and possibility of sudden material covenant deterioration. TPs may not be aligned to the scheme’s LTFT. Increased risk to employer from greater sensitivity to investment volatility and shorter timescales for correction.
Covenant	Where there is a high level of covenant leakage, consider proportionately increased DRCs and shorter recovery plans. Proportionate covenant monitoring. Clear IRM strategy, with realistic contingency planning for key downside risks. Focus on the resilience of the employer to withstand downside risks over a shorter time horizon.
Investment	Set a long-term asset allocation consistent with the scheme’s LTFT. Establish a journey plan to move towards the long-term asset allocation. Review the LDI strategy and assess it for operational resilience — see our recently issued guidance. Quantify the impact on funding of adverse investment performance. Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan. Investment and funding plans to be structured to recognise the shorter time horizon, as well as the interplay between volatility in asset prices, investment returns and benefit outflows. Consider your forward-looking liquidity requirements in the light of expected transfer value activity, cash commutation and benefit payments.
Funding	Agree your ultimate goal for the scheme and set a consistent LTFT. Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale. Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT. If concerned about risk of trapped surplus, consider using escrow, ABCs, and contingency planning. Schemes close to surplus on the TP basis should test adequacy of TPs against assets needed to satisfy your LTFT. Any recent funding gains should be applied to strengthen LTFT, if appropriate, and reduce investment risk. Extending recovery plan end dates to make good any negative investment returns is unlikely to be acceptable, given the strength of the employer.

B1 table

What we expect from trustees and employers
Group	B1
Characteristics	Strong or tending to strong covenant. Scheme’s funding is behind plan/TPs are weak and/or recovery plans are longer than six years. Scheme is relatively immature.
Key risks	Employer exposed to market risk if scheme is not cash flow matched/hedged. Covenant weakens at the same time as investments underperform. Lack of long-term covenant visibility and possibility of sudden material covenant deterioration. TPs may not be aligned to the scheme’s LTFT.
Covenant	Proportionate covenant monitoring. Where there is a high level of covenant leakage, proportionately increased DRCs and/or shorter recovery plans should be the norm. In addition to enhancements to the recovery plan, strengthen short- term security through other means such as contingent assets and guarantees where available. Understand longer term risks including ESG factors.
Investment	Set a long-term asset allocation consistent with the scheme’s LTFT. Establish a journey plan to move towards the long-term asset allocation. Review the LDI strategy and assess it for operational resilience — see our recently issued guidance. Quantify the impact on funding of adverse investment performance. Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan. A focus on trustees to understand, quantify and justify the reliance on investment returns versus DRCs to repair a worse than anticipated deficit.
Funding	Strengthen TPs, increase DRCs and reduce recovery plan lengths. Review your ultimate goal for the scheme and set a consistent LTFT. Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale. Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT. If concerned about risk of trapped surplus, consider using escrow, ABCs, and contingency planning. Extending recovery plan end dates to make good any negative experience is unlikely to be acceptable, given the strength of the employer.

B2 table

What we expect from trustees and employers
Group	B2
Characteristics	Strong or tending to strong covenant. Scheme’s funding is behind plan/TPs are weak and/or recovery plans are longer than six years. Scheme is relatively mature.
Key risks	Employer exposed to market risk if scheme is not cash flow matched/hedged. Covenant weakens at the same time as investments underperform. Lack of covenant visibility and possibility of sudden material covenant deterioration. TPs may not be aligned to the scheme’s LTFT. Shorter timeframe to align with LTFT. Increased risk to employer from greater sensitivity to investment volatility, and shorter timescales for correction.
Covenant	Proportionate covenant monitoring. Where there is a high level of covenant leakage, proportionately increased DRCs and/or shorter recovery plans should be the norm. In addition to enhancements to the recovery plan, strengthen short term security through other means such as contingent assets and guarantees where available. The priority is to ensure the scheme is receiving sufficient cash contributions to meet its needs and is being treated fairly, plus a greater imperative to bolster security through contingent assets and contingency plans.
Investment	Set a long-term asset allocation consistent with the scheme’s LTFT. Establish a journey plan to move towards the long-term asset allocation. Review the LDI strategy and assess it for operational resilience — see our recently issued guidance. Quantify the impact on funding of adverse investment performance. Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan. Investment and funding plans to be structured to recognise the shorter time horizon, as well as the interplay between volatility in asset prices, investment returns and benefit outflows. Consider your forward-looking liquidity requirements in the light of expected transfer value activity, cash commutation and benefit payments. The priority is to protect the scheme and employer from further downside while improving funding position by further cash and/or contingent assets.
Funding	Strengthen TPs, increase DRCs and reduce recovery plan lengths. Agree your ultimate goal for the scheme and set a consistent LTFT. Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale. Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT. If concerned about risk of trapped surplus, consider using escrow, ABCs, and contingency planning. Extending recovery plan end dates to make good any negative investment returns is unlikely to be acceptable, given the strength of the employer. A stronger focus on improving TPs and recovery plans to align with the scheme’s LTFT.

C1 table

What we expect from trustees and employers
Group	C1
Characteristics	Weaker employer with limited affordability. Scheme funding on track to meet LTFT and contributions are reducing deficits at a slower but affordable pace. Scheme is relatively immature.
Key risks	Employer exposed to market risk if scheme is not cash flow matched/hedged. Weaker covenant, may be more susceptible to adverse future events. Covenant weakens at the same time as investments underperform. Lack of long-term covenant visibility and possibility of sudden material covenant deterioration. TPs may not be aligned to the scheme’s LTFT. Risk of the employer being unable to pay increased contributions if a downside investment event occurs, or in the event of sustained adverse investment experience.
Covenant	Maximise DRCs without risking sustainable growth plans of the employer. Ensure fair treatment of scheme over all sources of covenant leakage. Consider non-cash funding options, for example ABCs, or guarantees to strengthen security. Proportionate covenant monitoring, with documented evidence of whether trustees consider independent covenant advice is necessary. Where employer is part of a stronger group, seek wider group support through cash and non-cash support.
Investment	Set a long-term asset allocation consistent with the scheme’s LTFT. Establish a journey plan to move towards the long-term asset allocation. Review the LDI strategy and assess it for operational resilience — see our recently issued guidance. Quantify the impact on funding of adverse investment performance. Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan. Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to asset allocation. Focus on diversification to reduce downside investment risk. Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding-based triggers/flags to monitor). Where there is no (or inadequate) group support, consider reducing the current level of investment risk and running it for longer to slowly reduce the deficit over time. Monitor transfer value activity and consider liquidity issues for the scheme if accompanied by a fall in market value of investments.
Funding	Review your ultimate goal for the scheme and set a consistent LTFT. Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale. Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT. If concerned about risk of trapped surplus, consider using escrow, ABCs, and contingency planning. Recognise that the employer may have less resilience to cope with volatile contributions — stress and scenario testing will help you to understand exposures.

C2 table

What we expect from trustees and employers
Group	C2
Characteristics	Weaker employer with limited affordability. Scheme funding on track to meet LTFT and contributions are reducing deficits at a slower but affordable pace. A relatively mature scheme.
Key risks	Employer exposed to market risk if scheme is not cash flow matched/hedged. Weaker covenant, may be more susceptible to adverse future events. Covenant weakens at the same time as investments underperform. Lack of covenant visibility and possibility of sudden material covenant deterioration. TPs may not be aligned to the scheme’s LTFT. Risk of the employer being unable to pay increased contributions if a downside investment event occurs, or in the event of sustained adverse investment experience. Increased risk to employer from greater sensitivity to investment volatility, and shorter timescales for correction.
Covenant	Maximise DRCs without risking sustainable growth plans of the employer. Ensure fair treatment of scheme over all sources of covenant leakage. Consider non-cash funding options, for example ABCs, guarantees to strengthen security. Proportionate covenant monitoring, with documented evidence of whether trustees consider independent covenant advice is necessary. Where employer is part of a stronger group, seek wider group support through cash and non-cash support. Acknowledge the additional constraint of a shorter time horizon.
Investment	Set a long-term asset allocation consistent with the scheme’s LTFT. Establish a journey plan to move towards the long-term asset allocation. Review the LDI strategy and assess it for operational resilience — see our recently issued guidance. Investment and funding plans to be structured to recognise the shorter time horizon, as well as the interplay between volatility in asset prices, investment returns and benefit outflows. Quantify the impact on funding of adverse investment performance. Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan. Consider your forward-looking liquidity requirements in the light of expected transfer value activity, cash commutation and benefit payments. Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to asset allocation. Focus on diversification to reduce downside investment risk. Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding-based triggers/flags to monitor). Ensure asset allocation provides sufficient income and liquidity to cope with expected and unexpected benefit cash flows. Consider the volatility of the assets used to provide liquidity to avoid significant selling of assets at lower than expected prices. If expecting high transfer value activity, take action now to protect the scheme against liquidity issues in the event of a market downturn.
Funding	Review your ultimate goal for the scheme and set a consistent LTFT. Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale. Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT. If concerned about risk of trapped surplus, consider using escrow, ABCs, and contingency planning. Recognise that the employer may have less resilience to cope with volatile contributions — stress and scenario testing will help you to understand exposures. Acknowledge the additional constraint of a shorter time horizon. Therefore, the LTFT and consistency with TPs is even more important.

D1 table

What we expect from trustees and employers
Group	D1
Characteristics	Weaker employer with limited affordability. Scheme’s TPs are weak and/or recovery plans are longer than six years. Scheme is relatively immature.
Key risks	Employer exposed to market risk if scheme is not cash flow matched/hedged. Weaker covenant, may be more susceptible to adverse future events. Covenant weakens at the same time as investments underperform. Lack of long-term covenant visibility and possibility of sudden material covenant deterioration. TPs may not be aligned to the scheme’s LTFT. Risk of the employer being unable to pay increased contributions if a downside investment event occurs, or in the event of sustained adverse investment experience. More urgent need to improve funding and reduce member risk.
Covenant	Maximise DRCs without risking sustainable growth plans of the employer. Ensure fair treatment of scheme over all sources of covenant leakage. Consider non-cash funding options, for example ABCs, guarantees to strengthen security. Proportionate covenant monitoring, with documented evidence of whether trustees consider independent covenant advice is necessary. Where employer is part of a stronger group, seek wider group support through cash and non-cash support. A greater focus on securing wider group support where available. Prioritise the scheme over all forms of covenant leakage. Trustees should give serious consideration to obtaining independent covenant advice to assist them in maximising the support available for the scheme. If trustees decide not to do so, they should be prepared to justify why such an approach is appropriate.
Investment	If adequate formal group support has been conferred, treat as follows: Set a long-term asset allocation consistent with the scheme’s LTFT. Establish a journey plan to move towards the long-term asset allocation. Quantify the impact on funding of adverse investment performance. Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan. Trustees should understand, quantify and justify the reliance on investment returns versus DRCs to repair a worse than anticipated deficit. Otherwise, if there is a reasonable likelihood of the employer continuing as a going concern, treat as follows: Set a long-term asset allocation consistent with the scheme’s LTFT. Establish a journey plan to move towards the long-term asset allocation. Quantify the impact on funding of adverse investment performance. Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan. Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to asset allocation. Focus on diversification to reduce downside investment risk. Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding-based triggers/flags to monitor). Where there is no (or inadequate) group support, consider reducing the current level of investment risk and running it for longer to slowly reduce the deficit over time. Monitor transfer value activity and consider liquidity issues for the scheme if accompanied by a fall in market value of investments. Where there are concerns over the financial position of the employer, ensure there is an appropriate investment structure and sufficient liquidity to reduce investment risk quickly if the covenant deteriorates further.
Funding	If adequate formal group support, treat as follows: Focus on strengthening TPs, increasing DRCs and reducing RP lengths. Review your ultimate goal for the scheme and set a consistent LTFT. Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale. Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT. If concerned about risk of trapped surplus, consider using escrow, ABCs, and contingency planning. Extending recovery plan end dates to make good any negative investment returns is unlikely to be acceptable, if adequate group support is available. Otherwise, treat as follows: Seek best possible funding outcome for members in the circumstances. Consider the appointment of a professional trustee with experience of stressed schemes. Be prepared to show evidence of appropriate measures, including review of any generous options and discretionary benefits, cessation of future accrual, consideration of winding up, managing your conflicts, awareness of future funding risks and ability to manage them. Monitor transfer value activity, the assumptions and consider any reductions you believe are appropriate to protect all members.

D2 table

What we expect from trustees and employers
Group	D2
Characteristics	Weaker employer with limited affordability. Scheme’s TPs are weak and/or recovery plans are longer than around six years. A relatively mature scheme.
Key risks	Employer exposed to market risk if scheme is not cash flow matched/hedged. Weaker covenant, may be more susceptible to adverse future events. Covenant weakens at the same time as investments underperform. Lack of covenant visibility and possibility of sudden material covenant deterioration. TPs may not be aligned to the scheme’s LTFT. Risk of the employer being unable to pay increased contributions if a downside investment event occurs, or in the event of sustained adverse investment experience. More urgent need to improve funding and reduce member risk. Increased risk of sudden or sustained adverse investment performance and shorter timeframe for correction.
Covenant	Maximise DRCs without risking sustainable growth plans of the employer. Ensure fair treatment of scheme over all sources of covenant leakage. Consider non-cash funding options, for example ABCs, guarantees to strengthen security. Proportionate covenant monitoring, with documented evidence of whether trustees consider independent covenant advice is necessary. Where employer is part of a stronger group, seek wider group support through cash and non-cash support. A greater focus on securing wider group support where available. Prioritise the scheme over all forms of covenant leakage. Trustees should give serious consideration to obtaining independent covenant advice to assist them in maximising the support available for the scheme. If trustees decide not to do so, they should be prepared to justify why such an approach is appropriate. A focus on maximising support for the scheme and prioritising scheme liabilities over all forms of covenant leakage.
Investment	Focus on minimising unsupported risks. If adequate formal group support has been conferred, treat as follows: Set a long-term asset allocation consistent with the scheme’s LTFT. Establish a journey plan to move towards the long-term asset allocation. Quantify the impact on funding of adverse investment performance. Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan. Trustees should understand, quantify and justify the reliance on investment returns versus DRCs to repair a worse than anticipated deficit. Otherwise, if there is a reasonable likelihood of the employer continuing as a going concern, treat as follows: Set a long-term asset allocation consistent with the scheme’s LTFT. Establish a journey plan to move towards the long-term asset allocation. Quantify the impact on funding of adverse investment performance. Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan. Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to asset allocation. Focus on diversification to reduce downside investment risk. Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding-based triggers/flags to monitor). Where there is no (or inadequate) group support, consider reducing the current level of investment risk and running it for longer to slowly reduce the deficit over time. Monitor transfer value activity and consider liquidity issues for the scheme if accompanied by a fall in market value of investments. Where there are concerns over the financial position of the employer, ensure there is an appropriate investment structure and sufficient liquidity to reduce investment risk quickly if the covenant deteriorates further.
Funding	Focus on improving scheme funding. If adequate formal group support, treat as follows: Review your ultimate goal for the scheme and set a consistent LTFT. Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale. Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT. If concerned about risk of trapped surplus, consider using escrow, ABCs, and contingency planning. Strengthen TPs, increase DRCs and reduce recovery plan lengths. Extending recovery plan end dates to make good any negative investment returns is unlikely to be acceptable, given adequate group support. Otherwise, treat as follows: Seek best possible funding outcome for members in the circumstances. Consider the appointment of a professional trustee with experience of stressed schemes. Be prepared to show evidence of appropriate measures, including review of any generous options and discretionary benefits, cessation of future accrual, consideration of winding up, managing your conflicts, awareness of future funding risks and ability to manage them. Monitor transfer value activity, the assumptions and consider any reductions you believe are appropriate to protect all members.

E1 table

What we expect from trustees and employers
Group	E1
Characteristics	Weak employer unable to provide support. Stressed scheme with limited or no ability to use flexibilities in the funding regime. Scheme is relatively immature.
Key risks	Crystallisation of unsupported investment risk and/or employer affordability weakening further.
Covenant	Where trustees consider that further support is possible (from the employer or wider group), independent covenant advice can support the trustees in negotiations to improve the scheme’s position. Focus on mitigations against further covenant weakening, including cessation of dividend payments, and maximisation of non-cash support (be prepared to show the evidence). Proportionate covenant monitoring using independent experts able to advise on areas where mitigation could be sought, and appropriate mechanisms to detect early signs of further deterioration. If there is a high risk of employer insolvency, trustees should fully explore their options and consider which ones might be deployed to best enhance member outcomes. PPF guidance on insolvency and restructuring should help.
Investment	Where there is a reasonable likelihood of the employer continuing as a going concern: Set a long-term asset allocation consistent with the scheme’s LTFT. Establish a journey plan to move towards the long-term asset allocation. Quantify the impact on funding of adverse investment performance. Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan. Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to asset allocation. Focus on diversification to reduce downside investment risk. Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding-based triggers/flags to monitor). Where there is no (or inadequate) group support, consider reducing the current level of investment risk and running it for longer to slowly reduce the deficit over time. Monitor transfer value activity and consider liquidity issues for the scheme if accompanied by a fall in market value of investments. Where there is a reasonable likelihood of the employer not continuing as a going concern: Where there are concerns over the financial position of the employer, ensure there is an appropriate investment structure and sufficient liquidity to reduce investment risk quickly if the covenant deteriorates further.
Funding	Seek best possible funding outcome for members in the circumstances. Consider the appointment of a professional trustee with experience of stressed schemes, especially in circumstances where the company is already distressed even without the pension scheme. Be prepared to show evidence of appropriate measures, including review of any generous options and discretionary benefits, cessation of future accrual, consideration of winding up, managing your conflicts, awareness of future funding risks and ability to manage them. Monitor transfer value activity, the assumptions and consider any reductions you believe are appropriate to protect all members.

E2 table

What we expect from trustees and employers
Group	E2
Characteristics	Weak employer unable to provide support. Stressed scheme with limited or no ability to use flexibilities in the funding regime. A relatively mature scheme.
Key risks	Crystallisation of unsupported investment risk and/or employer affordability weakening further but limited time for recovery.
Covenant	Where trustees consider that further support is possible (from the employer or wider group), independent covenant advice can support the trustees in negotiations to improve the scheme’s position. Recognising the time horizon is shorter, focus on mitigations against further covenant weakening, including cessation of dividend payments, and maximisation of non-cash support (be prepared to show the evidence). Proportionate covenant monitoring using independent experts able to advise on areas where mitigation could be sought, and appropriate mechanisms to detect early signs of further deterioration. If there is a high risk of employer insolvency, trustees should fully explore their options and consider which ones might be deployed to best enhance member outcomes. PPF guidance on insolvency and restructuring should help.
Investment	If there is a reasonable likelihood of the employer continuing as a going concern: Set a long-term asset allocation consistent with the scheme’s LTFT. Establish a journey plan to move towards the long-term asset allocation. Investment and funding plans to be structured to recognise the shorter time horizon, as well as the interplay between volatility in asset prices, investment returns and benefit outflows. Quantify the impact on funding of adverse investment performance. Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan. Consider your forward-looking liquidity requirements in the light of expected transfer value activity, cash commutation and benefit payments. Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to asset allocation. Focus on diversification to reduce downside investment risk. Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding-based triggers/flags to monitor). Ensure asset allocation provides sufficient income and liquidity to cope with expected and unexpected benefit cash flows. Consider the volatility of the assets used to provide liquidity to avoid significant selling of assets at lower than expected prices. If expecting high transfer value activity, take action now to protect the scheme against liquidity issues in the event of a market downturn. Where there are concerns over the financial position of the employer: Ensure there is an appropriate investment structure and sufficient liquidity to reduce investment risk quickly if the covenant deteriorates further.
Funding	Recognising that the time horizon is shorter, seek best possible funding outcome for members in the circumstances. Consider the appointment of a professional trustee with experience of stressed schemes. Be prepared to show evidence of appropriate measures, including review of any generous options and discretionary benefits, cessation of future accrual, consideration of winding up, managing your conflicts, awareness of future funding risks and ability to manage them. Monitor transfer value activity, the assumptions and consider any reductions you believe are appropriate to protect all members. Be prepared to evidence good reasons for not reducing transfer values for underfunding.