Defining “reasonable certainty” in the Funding & Investment Strategy regime

Trustees are required under the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 (the “Regulations”) to be “reasonably certain” about a range of matters including the sponsor’s cashflow generation, covenant longevity and their ability to access the value of contingent assets, both during the recovery period and on insolvency. But what does this concept mean and how will trustees properly conclude they are “reasonably certain”? 

In its updated covenant guidance published last December, the Pensions Regulator uses the term “reasonably certain” 35 times. The  Regulator’s final response to the statement of strategy consultation published on 28 May also deals with it. When considering the covenant adviser’s report, trustees should also seek legal advice to answer whether they are “reasonably certain” in law.

Where does the term “reasonable certainty” appear in the legislation?

The Regulations require trustees to analyse the strength of the employer covenant using the multifactorial approach set out in Regulation 7. That analysis must take account of:

• the cash flow and future cash flow of the employer
• other matters likely to affect the employer’s future ability to support the scheme
• how long the trustees can be “reasonably certain” they can rely on the assessment of the cash flow and the employer’s future ability to support the scheme
• how long the trustees can be “reasonably certain” that the employer will be able to continue to support the scheme.

Contingent assets can only be taken into account when assessing the strength of the employer covenant where the trustees can “reasonably expect” the contingent asset to be: (a) legally enforceable by them and (b) “sufficient to provide the support at the time the trustees may be required to enforce the support”. The Defined Benefit Funding Code of Practice speculates that most employers will end up with a reliance period of 3 to 6 years and a continuation of support period not exceeding 10 years.  This is speculation and not law. 

“Reasonably certain” and “reasonably expect” are not defined in the guidance, the Code of Practice or the Regulations. In its final response to the statement of strategy consultation, the Regulator recognised respondents’ concerns about it requesting reasonable certainty over figures, such as cash flows over an entire reliability period, that are inherently uncertain.  It notes that the phrase derives from the Regulations and cannot, therefore, be changed. However, in some comfort to trustees, it did say that: 

“We appreciate that forecasted cashflows will not always match actual cashflows. Our expectation of trustees is that they will provide covenant information in good faith, having done an appropriate level of due diligence in their forecasting”.

Nevertheless, given that the term is contained in the legislation, trustees and their covenant advisers will be looking to the scheme lawyer for advice as what is the relevant legal test so that the covenant adviser can apply the test to the facts and give a considered opinion as to whether it is met. 

What is the legal test?

The term “reasonable certainty” is not used in any pensions legislation other than the Regulations. Whilst it is used in five non-pensions statutes, these offer little assistance when interpreting the term in the current context.  There is also no direct case law. 

Here are some thoughts on “reasonable certainty”:

• It’s an objective test - what would a cohort of reasonable covenant advisers consider to be “reasonably certain”?
• The Oxford English Dictionary defines “reasonably” as a qualifier, as “fairly or pretty well”.  It requires a level of confidence that is higher than the more likely than not, civil “balance of probability” (51%) standard of proof;
• The closer you are to a 75% confidence level, the more likely a judge will accept that the trustees are “pretty well” certain;
• The test does not require a confidence level in excess of 75%. That is a criminal law test – beyond all reasonable doubt;
• No legal certainty test requires 100% certainty.

The nature and extent of the evidence that will be required for trustees to safely reach the requisite confidence level will depend on the particular context. 

A chair of trustees is required under section 221B(6) of the Pensions Act 2004 to sign the Statement of Strategy.  Depending on the risk and context, a chair of trustees should be looking to the trustees’ legal adviser to advise whether - based on the evidence and covenant advice – the trustees can properly conclude that they are “reasonably certain” in law.