This document sets out the tests and conditions a scheme must satisfy to meet the Fast Track parameters for schemes submitting a valuation with an effective date on and after 22 September 2024 to TPR through the Fast Track submission route. In this document, references to the code should be understood to mean the final DB funding code.
This document is not a statement of the law and nothing in it overrides the code.
Fast Track is not risk free. Fast Track is a regulatory tool which represents our view of tolerated risk where we are unlikely to engage with a scheme in respect of their valuation. It does not represent minimum compliance. In some instances, the Fast Track parameters are set above the minimum level of compliance, whilst in other instances, adopting Fast Track may not be the appropriate route.
Trustees should think carefully about whether Fast Track is right for their scheme and, in order to meet legislative compliance, whether a more prudent funding and investment approach is appropriate, particularly where there is very limited employer covenant support. Our code covers the arrangements we would expect trustees to follow in these circumstances.
Smaller schemes
Some simplifications are allowed for in the calculations for smaller schemes. These are shown in the relevant sections.
In this context, a smaller scheme is defined as one with 200 members or fewer. This figure should exclude members who are eligible for lump sum death benefits only, for hybrid schemes, members with defined contribution (DC) benefits only, and fully insured annuitants where they are not included in the calculation of the technical provisions (TPs) liabilities.
Use of yield curves
For Fast Track compliance, it is a condition that the discount rate and inflation assumptions should use the yield curve approach except for smaller schemes, as defined above.
For Fast Track compliance, the discount rate should be based on the gilt yield curve. The Bank of England publishes suitable gilt yield curves daily. In this context, the gilt yield reflects the full yield curve extrapolated appropriately.
For those smaller schemes, a spot rate may be used as a proxy for the yield curve. The discount rate and inflation assumption should be based on the Bank of England’s annualised spot gilt yield at a duration nearest to that of the scheme's duration.
Significant maturity
While we note that there are exemptions for specific schemes in the code whose significant maturity is lower than duration 10, for example cash balance schemes, for Fast Track purposes we are applying the same parameters to all schemes.
For schemes that do not meet all our Fast Track parameters, including those with exemptions regarding the date of significant maturity lower than duration 10, they will need to submit a Bespoke valuation.
Duration
Duration is calculated using the accrued liabilities and a basis consistent with the scheme's low dependency funding basis assumptions but derived using market conditions as at 31 March 2023, as set out in the regulations. For Fast Track, the economic assumptions at each valuation must be based on the economic conditions that applied at 31 March 2023, as if that were the valuation date.
For open schemes, the calculation of duration can use accrued liabilities and an allowance for future service.
For Fast Track, the allowance for future service can be no more than nine years of accrual, based on existing membership and benefit structure for schemes that are closed to new entrants. For schemes that are open to new entrants, the assumed number of new entrants to the scheme should not exceed the average level of new entrants over the three years preceding the current valuation.
Where appropriate, the trustees should choose a shorter period of future accrual or lower level of assumed new entrants to comply with the general principles in the code.
For the funding and investment stress calculation, the duration used in that specific calculation must be consistent with the duration used to determine whether a scheme meets that Fast Track parameter.
Fast Track – technical provisions
For a scheme to meet the Fast Track parameters, the scheme's TPs must be at least a minimum level. For the avoidance of doubt this funding level should be calculated excluding DC–only benefits.
This minimum level is determined as a percentage of the scheme's liabilities calculated on the low dependency funding basis. This minimum percentage varies by the duration of the scheme.
The minimum percentage is shown in Table 1 below.
Table 1: Fast Track TPs test parameters
| Duration | Minimum technical provisions (%) |
|---|---|
| 25 | 78.0% |
| 24 | 79.0% |
| 23 | 80.0% |
| 22 | 81.0% |
| 21 | 82.0% |
| 20 | 83.5% |
| 19 | 85.0% |
| 18 | 86.5% |
| 17 | 88.0% |
| 16 | 90.0% |
| 15 | 92.0% |
| 14 | 94.0% |
| 13 | 96.0% |
| 12 | 98.0% |
| 11 | 99.0% |
| 10 | 100.0% |
Where the duration is not an integer value, the parameters from this table should be interpolated.
For schemes with duration greater than 25, the parameter should be extended by a further deduction of 1.0% for every duration year beyond duration 25.
The Fast Track low dependency liabilities are the low dependency liabilities calculated on the minimum Fast Track low dependency basis described later in this document. Trustees may choose to use more prudent assumptions than these in their scheme's low dependency basis.
Where this is the case, and the scheme does not meet the test based on the scheme's own low dependency assumptions, the scheme actuary can carry out a further test using the Fast Track low dependency liabilities. If the TPs as a percentage of the Fast Track low dependency liabilities are greater than the parameter in Table 1 using duration consistent with this basis, the scheme is Fast Track compliant.
For a Fast Track submission, the actuary will confirm the liabilities meet or exceed the minimum level based on the scheme's own assumptions or the minimum assumptions required by Fast Track.
Fast Track – funding and investment stress
For a scheme to meet the Fast Track parameters, it must demonstrate that, if fully funded and invested in its current notional investment allocation as defined below, when stressed, the scheme’s funding level would not fall by more than a set percentage. This is the Fast Track funding and investment stress test. The percentage fall in funding levels depend on the duration of the scheme and are set out in Table 2.
Table 2: Fast Track funding and investment stress test parameters
| Duration | Stress parameter |
|---|---|
| 25 | 15.9% |
| 24 | 15.4% |
| 23 | 14.8% |
| 22 | 14.3% |
| 21 | 13.7% |
| 20 | 13.1% |
| 19 | 12.5% |
| 18 | 12.0% |
| 17 | 11.4% |
| 16 | 10.8% |
| 15 | 10.2% |
| 14 | 6.5% |
| 13 | 5.4% |
| 12 | 4.4% |
| 11 | 3.3% |
| 10 | 2.2% |
Where the duration is not an integer value, the parameters from this table should be interpolated.
For schemes with duration greater than 25, the parameter should be extended by a further addition of 0.5% for every duration year beyond duration 25.
In this context, by stressed we mean the assets and liabilities are adjusted to allow for a scenario reflecting potentially adverse changes in market conditions using specified parameters we set out below.
The calculation to determine the change in funding level is as follows:
1 – Minimum (Fast Track TP Parameter,Stressed Funding Level)
/ Minimum (Fast Track TP Parameter,Unstressed Funding Level)
Each element of this calculation is explained below.
Unstressed funding level
This is calculated as follows:
Unstressed Funding Level = Assets/Low Dependency Liabilities
The assets of the scheme should be consistent with the audited accounts. However, the value of assets should exclude the value of any asset backed contribution (ABC) assets included in the accounts. If a scheme has the value of insured assets included in the accounts, the asset value used should be consistent with that used in the calculation of the liabilities.
Stressed funding level
The stressed funding level is as follows:
Stressed Funding Level = Stressed Assets/Stressed Low Dependency Liabilities
Stressed assets
To calculate the stressed assets you use, see the asset categories in Table 3 and apply the following stress factors.
Table 3: Asset categories and stress factors
| Asset categories | Stress factor |
|---|---|
| Fixed interest UK government bonds | +17% |
| Fixed interest investment grade bonds other than UK government bonds | +3% |
| Fixed interest sub-investment grade bonds | -6% |
| Inflation-linked UK government bonds | +16% |
| UK quoted equities | -16% |
| Overseas quoted equities | -16% |
| Unquoted equities / private equity | -19% |
| Property | -4% |
| Diversified growth funds | -10% |
| Annuities | +16% |
| Cash | +0% |
| Other | -19% |
The average stress factor weighted by asset category percentage must be calculated. This is known as the asset stress factor.
Stressed assets are then calculated as follows:
Stressed Assets = Assets X (1+ Asset Stress Factor)
The percentage of assets in each category should be derived from the current notional investment allocation. The current notional investment allocation is the investment strategy, which supports the current funding assumptions. For a scheme on or after the relevant date, given that the funding assumptions should be consistent with a low dependency funding basis, the current notional investment allocation will be the same as the low dependency investment allocation from which the low dependency funding basis set out in the funding and investment strategy is derived.
These percentages should be worked out excluding any ABCs.
Where a scheme includes insured assets, these should be treated consistently with the approach adopted for calculating the low dependency liabilities.
Where the statement of strategy covers different asset categories, or is in a different format, they should be allocated in line with the appropriate asset class in table 3, based on their underlying characteristics.You can view our help file on asset breakdown for more information on asset categorisation for these purposes in relation to the scheme return.
Stressed liabilities
The calculation of the stressed liabilities uses the following parameters.
Table 4: Fast Track stressed liability parameters
| Liability stress factors | |
|---|---|
| Interest rate stress factor | -0.74% |
| Inflation stress factor | -0.11% |
The calculation of the stressed liabilities is as follows:
Stressed Low Dependency Liabilities
= Low Dependency Liabilities X ( 1
+ 0.74%) ^ (maximum (10,Duration at Valuation Date)) X (1
-0.11%) ^ (maximum (10,Duration at Valuation Date) X Inflation Liability Proportion)
The duration to be used should be consistent with the duration applied as to whether the scheme meets the test as set out in Table 2.
The inflation liability proportion is the proportion of the low dependency liabilities, which is sensitive to inflation.
Fast Track technical provisions parameter
This is the minimum parameter used to determine compliance with the TPs test, based on the duration of the scheme and taken from Table 1.
Overall
If the results of the calculation show a lower fall in funding level than the appropriate parameter derived from Table 2, the scheme is Fast Track compliant.
Where the scheme does not meet the test based on the scheme’s own low dependency assumptions, consistent with the TPs test, the scheme actuary can carry out a further test using the Fast Track low dependency liabilities. This test should use these liabilities and the duration calculated consistently with the Fast Track low dependency funding basis.
Fast Track – recovery plans
Where a recovery plan is needed, the following conditions must be satisfied to meet the Fast Track parameters.
Length of recovery plan
The recovery plan length must be no longer than:
(a) six years for a valuation where the valuation date is before the relevant date, irrespective of whether the relevant date occurs through the period of the recovery plan
(b) three years for a valuation where the valuation date is on or after the relevant date
The recovery plan length is measured from the effective date of the valuation.
Increases to deficit repair contributions (DRCs)
The annual increases to DRCs should not exceed either:
(c) CPI inflation using the CPI inflation adopted by the scheme for the purpose of calculating the low dependency liabilities
(d) fixed increases at a rate of 3% pa
For trustees with irregular payment schedules, an alternative test is that the cumulative undiscounted DRCs to the end of each year of the recovery plan are no less than would have been paid under a recovery plan compliant with (a), (b), (c) or (d) if appropriate.
This provision only applies to contributions received after the date the recovery plan is certified for both tests.
The minimum level of DRCs as specified here exclude expenses and accrual or any other payment or schedule of contributions, which should be allowed for separately.
No future outperformance in recovery plan and schedule of contributions
No allowance for future investment outperformance should be allowed for in the recovery plan or schedule of contributions for Fast Track compliance.
Post–valuation experience
Post–valuation experience can be taken into account in setting the recovery plan and for being Fast Track compliant. When done so, all significant changes, favourable as well as unfavourable, in the scheme’s assets, liabilities and covenant should be allowed for.
The trustees should report the date up to which post-valuation experience has been allowed and the updated assets and TPs used in the certification of the schedule of contributions. The TPs should also meet Fast Track parameters at the date to which post-valuation experience has been allowed.
Where post-valuation experience is allowed for in Fast Track, the certification of the schedule of contributions must be in the form as set out in Schedule 1 of The Occupational Pension Schemes (Scheme Funding) Regulations 2005.
Fast Track – low dependency funding basis
In Fast Track, the scheme's low dependency funding basis needs to follow the principles set out in the code. In addition to these principles, certain assumptions are specified in Fast Track and assumptions at least as strong as these need to be used by the scheme.
The low dependency funding basis needs to calculated using the 'risk–free plus' approach, using the gilt yield curve for the risk-free element, extrapolated appropriately. The Bank of England is one organisation that publishes a set of suitable gilt yield curves daily.
All other approaches that are not consistent with this approach, for example the use of a swaps curve or the use of a dynamic discount rate approach, must be submitted through the Bespoke route.
The liabilities calculated on the minimum strength assumptions listed below are known as the Fast Track low dependency liabilities. This is the minimum value of low dependency liabilities that meet the Fast Track parameters. Therefore, the scheme’s low dependency liabilities must be this value or higher.
A summary of the code principles and the minimum Fast Track low dependency requirements that must be followed are shown below. These requirements apply to each assumption individually, rather than to the strength of the basis in aggregate.
Low dependency discount rate
Code principles and expectations
The discount rate could be expressed allowing for a margin over a risk–free yield.
An acceptable risk–free yield includes either the:
- gilt yield
- yield on swaps if adjusted for the probability of default
The margin added to the risk-free rate should be a prudent estimate of the return on the trustees' low dependency investment allocation. This prudent estimate should have regard to material factors that may affect investment returns over the relevant time horizon, such as climate change and other systemic trends.
Minimum Fast Track low dependency requirements
The low dependency discount rate should be based on the gilt yield curve with an addition that should not be greater than 0.5%.
For schemes with less than 200 members, a spot rate may be used as a proxy for the yield curve. The gilt rate should be the Bank of England's annualised spot gilt yield at a duration nearest to that of the scheme's duration. The scheme's duration is calculated at the date of the valuation using the low dependency liabilities, and determination of this discount rate could be an iterative process.
The discount rates can be rounded to one or more decimal places.
RPI inflation
Code principles and expectations
Under the risk–free plus approach, the RPI assumption should be based on a market-derived assumption for inflation using an approach consistent with that used for setting the discount rate.
For example, where a gilt yield curve is used to derive the discount rate, we would expect a yield curve approach based on gilts to be used to derive the inflation assumptions.
As the scheme is expected to be significantly hedged at the relevant date, our expectation is that no adjustment, such as an inflation risk premium, would be made to the market implied assumption. If an adjustment is made, we may require further information to understand the justification for it.
Minimum Fast Track low dependency requirements
The RPI assumption should be derived from the difference between index linked and nominal gilts.
No adjustment, such as an inflation risk premium, should be made to the market implied assumption.
For schemes with less than 200 members, a spot rate may be used as a proxy for the yield curve where the same approach is being used for the discount rate. The spot rate should be the Bank of England spot inflation assumption at the same duration used to derive the discount rate.
The inflation assumptions can be rounded to one or more decimal places.
CPI inflation
Code principles and expectations
The CPI assumption should be based on the RPI assumption, adjusted to reflect the expected difference between RPI and CPI, having regard to both historical trends and the planned changes in RPI expected to apply from 2030.
Minimum Fast Track low dependency requirements
The CPI assumption should be derived by reference to the RPI assumption adjusted as follows.
- Pre–February 2030 a maximum reduction of 0.8%.
- No reduction from February 2030 onwards.
For schemes with 200 or fewer members, a spot rate may be used with CPI assumed equal to RPI. However, if all CPI–related increases are projected to be paid before 2030, a maximum deduction of 0.8% can be assumed.
Inflation–related pension increases
Code principles and expectations
The assumptions should be based on the relevant measure of inflation adjusted to allow for caps and floors based on a recognised method, such as, for example the Black or Black–Scholes, SABR, Jarrow–Yildirim, 'hard capping' or Truncated Gamma models, and an appropriate inflation volatility and other assumptions where required by the model.
In determining the appropriate assumptions, consideration should be given to past experience and whether this provides a guide to the future, given current market conditions, or how that experience should be adjusted to derive an appropriate assumption.
Minimum Fast Track low dependency requirements
As per code principles.
Cash commutation
Code principles and expectations
Members may be assumed to commute part of their retirement pension for a cash lump sum.
Where prudent, the proportion commuted should be no higher than recent experience and any projections should allow for any decreasing trend.
Also, where prudent, the assumed commutation factor should be no lower than currently agreed factors and/or, where appropriate, future factors where it has been agreed in principle they will be implemented. This will include market–based factors where it is agreed the factors will be automatically updated.
It can be appropriate to assume that a commutation factor is a percentage of the liabilities where such an assumption would be consistent with the previous principles.
When appropriate, consideration should be given to making an allowance for future improvements in mortality.
For example, where the trustees have the sole power to set cash commutation factors and those factors reflect the actuarial value of the pension commuted, we would expect an allowance for future improvements to factors to be made consistent with the trustees' expectations for how mortality will improve in the future.
Minimum Fast Track low dependency requirements
As per code principles.
Mortality base table
Code principles and expectations
This is based on current expectations of mortality using appropriate mortality tools.
For example:
- a 'postcode' analysis and/or experience to adjust standard tables where recent credible information is available
- a bespoke mortality table based on experience
We expect many schemes will want to commission such analysis and would generally expect all trustees to have considered doing so. If this analysis is not done, standard tables may be used and consideration should be given to choosing a table reflecting the size of the pension where this might be appropriate as a guide to the socio–demographic status of the membership.
However, where such a standard approach is taken, we would expect the uncertainty of experience to be reflected in a more prudent set of rates being chosen.
Different groups of members can have different base mortality tables where there is evidence to justify their different treatment.
For example, those qualifying for an ill health pension might exhibit different mortality to those retiring with standard benefits.
Minimum Fast Track low dependency requirements
As per code principles.
Mortality improvements
Code principles and expectations
We expect appropriate assumptions for future mortality improvements should be chosen based on prudent principles allowing for the uncertain nature of future mortality improvements.
Consideration should be given to socio–economic factors specific to the scheme and how this should be reflected in the assumptions chosen.
Minimum Fast Track low dependency requirements
As per code principles, with the requirement that improvements need to adopt a recent CMI core or extended model, or equivalent model from an industry recognised reputable longevity company.
Salary increases
Code principles and expectations
The salary increase assumption can be a single rate or more complex, for example making allowance for promotional increases.
Where not constrained by the rules of the scheme or an established policy communicated to employees, we would expect salary increases to be at least as high as an appropriate inflation assumption.
Minimum Fast Track low dependency requirements
As per code principles.
Proportion with partners eligible for survivor pensions and age difference
Code principles and expectations
Where the scheme provides for survivor pensions, trustees should make appropriate allowance for the proportion entitled to survivor benefits and the age difference with the survivor.
When considering each assumption, where there is reliable and statistically credible scheme specific evidence available, we would expect the strength of assumptions chosen to be no lower than that implied by recent experience.
Where such evidence is not available, we would expect the assumptions to be:
- based on generic statistical tables, adjusted where necessary to allow for the scheme specific nature of the assumptions, and in the case of proportion married, for the rules of the scheme determining eligibility for survivor benefits, or
- be at least as strong as that provided by the Pension Protection Fund (PPF) guidance on relevant assumptions to use in their section on assumptions for contingent benefits when undertaking a valuation in accordance with Section 179 of the Pensions Act 2004
Minimum Fast Track low dependency requirements
Scheme–specific evidence may be used as described in the principles in the code.
Where this is not available, the assumption chosen should be at least as strong as that consistent with PPF guidance for section 179 purposes.
Discretionary benefits
Code principles and expectations
Where there is a reasonable expectation that discretionary benefits will be granted in the long term, trustees should consider whether it is or is not appropriate to make reasonable allowance for these benefits in the low dependency funding basis and set an assumption accordingly.
Minimum Fast Track low dependency requirements
As per code principles.
Other assumptions
Code principles and expectations
There may be some assumptions needed as part of the valuation where we have not given our expectations in this section, for example retirement ages, withdrawal rate, or the allowance for scheme options other than cash commutation.
In setting assumptions where we have not given guidance, the following principles should be applied.
- Assumptions can draw on scheme experience where statistically credible analysis of recent experience is available, and the expectation is that the past remains a good guide to future experience.
- If this information is not available, standard tables or estimates may be used but the level of uncertainty in respect of scheme-specific factors should be reflected in additional prudence in the assumptions chosen.
- The impact on the liabilities can be considered when choosing assumptions, so for example a more approximate method would be reasonable where the choice of assumption will not significantly affect the liabilities.
- More generally, if it is an assumption not specific to the scheme and we have provided no guidance we would expect, where relevant, the derivation to be consistent with the derivation of other assumptions where guidance or specification has been provided.
Minimum Fast Track low dependency requirements
In line with the code principles, but with the additional requirement that scheme options, excluding those covered separately in this table like cash commutation, should only be allowed for to the extent they increase the liabilities in the low dependency funding basis.
Where it is prudent (for example for schemes who have chosen a salary increase assumption lower than an appropriate inflation assumption, because of the rules of the scheme or an established policy communicated to employees) the withdrawal assumption for liabilities should reflect the assumption for new entrants and future accrual used in the duration calculation for the TPs test. In these circumstances this means that accrual is capped at nine years and should be assumed members withdraw when accrual ceases.
Expenses
Code principles and expectations
That expense reserve should be the value of all non-investment related expenses of the scheme, including annual levies and adviser fees expected to be incurred on and after the relevant date discounted to the valuation date.
The expenses should be consistent with the long-term strategy adopted by the trustees. For example:
- if the strategy assumes the scheme will run on, it should be all the expenses associated with this
- for a scheme that is targeting buy-out, it should include the expenses associated with that strategy
Where at least one statutory employer has a legal obligation to meet part of the expenses, we expect the low dependency basis to include a reserve for at least the expenses not met by the employer.
For immature schemes, we recognise the expense reserve will be an approximate estimate. This estimate can reflect that the scheme may incur lower ongoing adviser fees once it achieves its long–term target funding and investment strategies and that the scheme may be smaller by the relevant date. As a scheme approaches its relevant date it should be possible to make that estimate more accurate.
For schemes at or past the relevant date, the expense reserve should be a more accurate estimate which we expect to be monitored and updated in line with experience.
Minimum Fast Track low dependency requirements
As per code principles. The exception to this, as set out in the code principles, applies in those cases, where there is at least one statutory employer with a legal obligation to pay scheme expenses.
For schemes with 200 or fewer members, expenses calculated using the expense assumptions consistent with PPF guidance for section 179 purposes can be considered suitable for these purposes.
Submission and confirmation by scheme actuary
Fast Track submissions should include a confirmation from the scheme actuary that the valuation meets Fast Track parameters.
To make a Fast Track submission, the scheme actuary must confirm that the Fast Track tests have been calculated and the results meet Fast Track parameters. They should also confirm that the Fast Track conditions for the recovery plan, the schedule of contributions and the low dependency liabilities are met.
The scheme actuary is being asked to confirm that the tests and conditions described in this document are met. These are factual matters and the actuary is not being asked to confirm as to whether, in their opinion, Fast Track is appropriate or the legislation and principles in the code are being complied with.
The scheme actuary should judge how much detail must be used in applying the tests or conditions. For example, simplifications can be made in the test calculations where the scheme actuary would be certain those simplifications would not influence whether the scheme met Fast Track parameters.