The Case For Dynamism In Discount Rates For Pension Scheme Funding

WTW's Gareth Connolly set out his thoughts on the use of 'dynamic discount rates' in pension scheme funding and how they can be used create a more stable funding approach for the scheme's journey.

For a number of years¹ trustees have been encouraged by TPR to think about their long term objectives. This concept has been fleshed out further in a subsequent White Paper² and effectively rebranded as the "funding and investment strategy" in the Pensions Act 2021³ . One such objective, as described in the 2018 White Paper is to "reach self sufficiency with low risk investment strategy and run off with minimal call on the sponsor".

With the final draft of the 2024 funding and investment strategy regulations⁴ now published and the resulting need for trustees to agree an objective, this article explores what we mean by a dynamic discount rate ("DDR") and the benefits that such an approach might bring, in conjunction with a run-off objective.