Pension Trustees – The importance of creating a Journey Plan

Nov 5, 2019


In their latest document – Annual funding statement 2019 for defined benefit pension schemes – TPR’s focus is on trustees having a long term journey plan.

It’s about DB pension schemes having long term funding targets and ensuring trustees and employers having a clear strategy for achieving this.

 ‘Paying the promised benefits is the key objective for all schemes.’ TPR

Whilst DB schemes used to be considered as running into the future for an indefinite period, DB schemes are now closing to new members. With an end date in mind, it’s even more important there is a plan in place to make sure the Long Term Financial goals are met. 

The future could, for example, be buying out members’ benefits with an insurance company or continuing schemes indefinitely and paying pensions until the last pensioner dies.  

Or, if your scheme is getting close to buyout, then you really should be thinking about the quality of your data and ensuring that legal documents are in order. 

Establishing which route you are aiming for is critical because different endgames require different strategies.

Schemes that do well at this have a strategy showing a clear understanding of how the balance between investment risk, contributions and covenant support may change over time, particularly as the scheme gets better funded and more mature.

A journey plan documents the sponsor’s and trustees’ ultimate goal for their scheme and sets out how and when they plan to reach it.

When writing your journey plan there are four questions you should be asking yourself:

  • What is the end-game target for your scheme?
  • What is the right initial level of return and risk?
  • How might the target return and risk reduce over time? 
  • How should you adjust your strategy if or when circumstances change?

Answering these should help inform your journey plan which should take an integrated approach to managing risks in relation to the employer covenant and your funding and investment strategies.

1. The Covenant

The covenant is a fundamental element in the sponsor/scheme relationship. Whilst the Integrated Risk management framework is about the mix of covenant, investment and funding, the last two hang off the covenant.

The TPR defines it as,
 “… the employer’s legal obligation and financial ability to support their defined benefit (DB) scheme now and in the future.”

i.e. can the sponsor meet the cost of providing the pension promised to members? And can they do it without damaging the business’s ability to thrive and grow? Their ability to support the scheme should inform your investment and funding decisions. 

It’s important to assess and regularly monitor your covenant to help you decide the appropriate level of risk when setting your investment strategy, funding target and, where necessary, recovery plan. Put simply, how many companies which were household names even ten years ago now no longer exist? In a nutshell, this is why trustees are under increasing pressure to reduce recovery plan timescales.

TPR have issued guidelines for assessing your covenant – Click here

2. Scheme funding

In order to ensure your scheme meets its objectives, you will need an approach to funding the scheme that is balanced and reflects the employer’s circumstances. It needs to be appropriate for the scheme and in the best interests of the members.

You should identify a statement of funding principle that you have agreed with the employer and you will also need a schedule of contributions.

If necessary, create a recovery plan which addresses the implications of failing to put in place an adequate funding solution.

For example, having predetermined funding triggers which ensure that, at the very least, the trustees review the position. They may, and in our view should, have sought agreement with the sponsor to effectively bank the gains and further de-risk the portfolio. If the covenant is such that losing £1 is more painful than the potential benefit of gaining £1, then trustees must take this into account.


3. Investment strategy

In our experience, trustees fully understand that the best guarantee they have of paying member benefits in full is having a strong sponsor to support the scheme. Equally, employers are unwilling to tie up cash in a pension scheme that they want to use to develop their business and in so doing improve the strength of the employers covenant to the scheme.

Your investment strategy should tie in with the covenant and funding strategy to make sure it makes sense.

You are likely to go backwards and forwards with your investment objectives and investment strategy as you make adjustments to your risk appetite and investment objectives until an investment strategy can be found that satisfies both.

The investment strategy needs to be designed to enable the pension scheme to reach its agreed long term funding target. At the same time, trustees need to look to mitigate the risks of a global recession, the risks associated with changes to member longevity, interest rates and inflation, the need for cash to pay benefits as they fall due and to achieve at least the rate of return used by the Scheme Actuary in the scheme valuation.

A major concern here is that to do all these things, some of which push and pull against each other, solutions can be complex. Trustees need to be able to have confidence they understand what they are invested in and why. This requires good levels of training, immediate and on-going, as well as the governance to do all this.


TPR is expecting DB pension schemes to have a journey plan to ensure that long term funding targets are hit to meet the objective of paying the promised benefits.

A journey plan should consist of an integrated approach across the covenant, funding and investment strategies. It’s not easy.

“Always plan ahead. It wasn’t raining when Noah built the ark” – Richard Cushing

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If you would like a review of yours or help in creating it, we would be more than happy to help and share our trustee experience. Please contact us – we’d love to talk to you.


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