UK Pension Update: Pensions Regulator Issues First Annual Funding Report under the New Funding Regulation
The Pensions Regulator (TPR) has published its annual funding statement for private sector defined benefit (DB) schemes, emphasising the transition of schemes from deficit recovery to endgame strategies. This shift is expected to occur as most DB schemes prepare for the long-term future, considering insurance-led solutions or run-on strategies.
Collaborative Approach and Employer Covenant
TPR encourages trustees to engage early in the valuation cycle with their advisers, promoting a collaborative approach. The importance of the employer covenant remains an integral element when assessing the level of supportable risk within a scheme's journey plan. Trustees are advised to be aware of the impact of macroeconomic uncertainty on scheme investments and employer covenants, ensuring short-term liquidity requirements can be met while their long-term investment strategy continues to reflect the changing economic landscape.
Funding Levels and Endgame Planning
DB schemes are at the highest funding level on record, enabling some well-funded schemes to safely release surplus funds for reinvestment or enhanced member benefits. TPR has grouped schemes into three broad funding level categories for the new DB funding code: above low dependency, above technical provisions but below low dependency, and below technical provisions. Each funding level category has specific areas of focus. Above low dependency schemes should focus on endgame planning, continuing schemes below low dependency should continue following their path to achieving low dependency, and below technical provisions schemes should address their deficit as quickly as reasonably affordable.
Bulk Annuity Market Expansion
The bulk annuity market has seen significant growth, with increased competition offering more options for schemes to secure their liabilities through insurance solutions. Trustees should refer to TPR's updated covenant guidance and climate-related governance and reporting guidance when assessing and monitoring the employer covenant.
Regulatory Developments
The new DB Funding Code and Covenant Guidance are significant regulatory developments that impact DB schemes. While specific details from the 2025 Annual Funding Statement are not provided, these codes typically aim to ensure schemes are adequately funded and monitor their financial health in relation to their sponsors' ability to support them. TPR has published new covenant guidance in December 2024, providing further clarification in Appendix 1 to the statement.
Looking Ahead
The Regulator will publish new guidance on the endgame strategy over the coming weeks. Trustees should have a policy for the potential release of surplus and discuss how they would approach any such requests from the employer. Advance consideration should be given to the development of a policy on surplus release, pending legislation due to be published before the summer recess of Parliament. The Regulator no longer intends to publish a supportable risk formula, adopting a principles-based approach in the DB funding code. Further guidance on endgame planning will be published in early summer.
In conclusion, while the specific details from the Regulator's statement on the new DB Funding Code and Covenant Guidance are not explicitly mentioned, these regulatory developments are crucial for guiding how DB schemes manage their funding and covenant positions effectively. The shift from deficit repair to endgame planning is expected to be a significant change for many schemes, and trustees are advised to prepare accordingly.
[1] Bulk annuity market growth [2] DB Funding Code and Covenant Guidance [3] DB Schemes at highest funding level on record
- The bulk annuity market has experienced significant growth, presenting more opportunities for defined benefit (DB) schemes to secure their liabilities through insurance solutions.
- The DB Funding Code and Covenant Guidance, recent regulatory developments, are intended to ensure DB schemes are adequately funded and monitored in relation to their sponsors' ability to support them.
- Defined benefit (DB) schemes are currently at the highest funding level on record, allowing some well-funded schemes to reinvest or enhance member benefits.
