The Pensions Regulator’s annual funding statement 2023: key messages for trustees

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The Pensions Regulator’s (TPR’s) annual funding statement 2023 (the AFS) contains a number of key messages for relevant schemes, some of which touch upon messages from recent years’ statements and others that are new, reflecting recent economic and financial events.

The AFS is directed at schemes that are undertaking valuations with effective dates between 22 September 2022 and 21 September 2023 or undergoing material changes that necessitate a review of their funding and risk strategies. It also has general relevance for other schemes.

Key message

Generally, defined benefit (DB) pension schemes’ funding levels have improved, but this varies between schemes and, because economic and financial uncertainty remains, schemes “should not be complacent.”

“It is important to satisfy yourself that your long-term target remains appropriate and your funding and investment strategies are aligned to it. You must act in the best financial interests of your scheme members and beneficiaries, if you haven’t agreed a long-term funding target (LTFT) yet, you should do so as a priority.”

Key actions

There have been material changes for DB schemes in the past year – the significant increases in gilt yields and the consequential changes in funding will have ‘surprised many’. Most schemes have seen an improvement in funding – the Regulator estimates that a quarter of schemes could now buy-out. However, there are a minority that have experienced falling funding levels, for example, those that were not able to meet recent Liability-Driven Investing (LDI) collateral calls.

Against this backdrop, the key action is for schemes to analyse their position on the long-term journey plan (or set one if need be). They should consider not just future risks but also opportunities with different considerations applying depending upon scheme type. The Regulator encourages schemes to lock in funding gains where possible and expects those with falling funding levels to check that funding plans remain on track.

General considerations

Improved funding

  • Schemes with improved funding should consider the appropriateness of their LTFT, adjust this where appropriate (for example, to assess buy-out or other endgame viability) and determine if the current strategy and risk is in members’ best interests with appropriate changes being made where not (for example, reducing risk).
  • Funding and investment risk needs to correspond with available employer support with ‘effective information sharing protocols’ to enable sufficient monitoring of the covenant. Do not be caught out – although covenants may seem stronger because of improved funding levels, employers may also have been affected by “high inflation, low economic growth, high energy costs and higher borrowing costs.”

Decreased funding

Schemes with decreased funding levels should adjust their funding and investment strategies, if necessary, to ensure alignment with the LTFT. They should refer, where need be, to the Regulator’s LDI guidance (see also our Entrust Insight).

Open schemes

Open schemes may have experienced a significant decrease in estimated liabilities with more significant funding level changes. Although there are different considerations for open schemes, such as less focus on the LTFT and a longer need for covenant support, the AFS principles will still be of use when looking at the market environment and improved funding.

Economic uncertainty

Trustees need to be aware of continued economic uncertainty and the differing effect this can have on both investments and covenant.

Tailored guidance

The Regulator provides tailored guidance for schemes dependent on three groupings.

Group I: Funding level at or above buy-out – consider buy-out or running on the scheme

Trustees of Group I schemes need to consider whether to buy-out or continue running the scheme, for example, to benefit from future surpluses. Advice and employer input will be required. It is important that a scheme is sufficiently prepared to buy-out especially given the current capacity constraints among insurers. This will involve making sure data is ready and investments are in buy-out friendly assets. Schemes that are ready for buy-out, but market conditions mean this is not possible, will need to look at other ways to protect the funding position.

Group II: Funding level above technical provisions (TP) but below buy-out – consider appropriateness of the LTFT

Consider whether the LTFT is still suitable. Going above TPs should prompt next steps such as strengthening the TPs or reducing investment risk and a possible speeding up of the LTFT timescales. Good practice for schemes in Group II includes seeing where the scheme is in comparison with the revised DB funding code principles (see our insight).

Group III: Funding level below TPs – focus on ‘bridging gap’ to TP funding level

Schemes in this group should concentrate on eliminating the deficit as soon as the employer can reasonably afford and assessing whether the TPs are in line with the LTFT with risks being commensurate with the employer’s covenant.

Rethinking strategies

The Regulator provides some input on what it considers important in the current environment in terms of investment and covenant strategies.

Rethinking strategies: investment considerations

The AFS discusses more on investments than previous years which may be a reflection of the emphasis that the revised DB funding regime places on investment, the increasing maturity of many schemes and recent market events.

The Regulator references the increase in long-term global interest rates and the need for schemes to consider the impact on the investment strategy given that a lot of schemes’ asset allocation may look significantly different to expectations. Recent conditions may also present a chance to de-risk.

Trustees must discuss with advisers how to manage illiquid assets where these are greater than anticipated. The Regulator notes that there may be less current demand for such assets set against an increased desire to sell. The AFS includes factors that should be considered in the discussions.

The Regulator’s LDI guidance should be considered where appropriate.

Rethinking strategies: covenant considerations

This part reminds trustees that covenant is still ‘intrinsically linked’ until a scheme reaches the ‘end game’. Although schemes may seem to need covenant support less because of improved funding, circumstances can change quickly bringing an increased need to rely on covenant. Sufficient consideration should be given to the present economic climate which may impact the employer – understanding what factors impact the employer is important.

Schemes with markedly improved funding may be able to move from a focus on free cashflow use (if no recovery plan) to consideration of covenant longevity and ESG risks.

However, even schemes with low dependency on employer support should continue to monitor the covenant.

The key message is to avoid complacency although an assessment’s focus and how covenant is monitored may change depending upon scheme circumstances.

Other considerations

This section provides guidance on four areas:


There is reference to the 2022 mortality rate being higher than pre-pandemic rates and this perhaps pointing towards future higher mortality rates and lower life expectancy– trustees should take a cautious approach when interpreting this given the current uncertainty.


The Regulator’s views on high inflation remain the same as those set out in the 2022 statement (see our In-depth Insight).

Revising RPs and contingent assets

The Regulator expects that any reduction or suspension of deficit recovery contributions is only made after consideration of certain matters as set out in the statement. Adequate mitigation is needed for employers in distress. There is also guidance for trustees where employers wish to renegotiate contingent asset terms.

Assessing refinancing risk

It is important that refinancing risk is included in covenant assessments and monitoring (see here for details of the Regulator’s recent refinancing blog). If there is a refinancing and this will be ‘well progressed’ before completion of a valuation, the covenant assessment should not be completed until refinancing terms become clear. Refinancing that will take place soon but after a valuation date should be considered when assessing future covenant.

What else to expect from the Regulator

Revised DB funding regime

The new funding and investment regulations as well as revised DB funding code of practice are expected to come into force for valuations with an effective date during and after April 2024. All valuations with an effective date prior to implementation of the new regime will be subject to the existing funding regime.

Updated employer covenant guidance

A draft will be published at some point this year – expect more detail on covenant visibility, reliability and longevity as well as treatment of guarantees and ESG risks.

Sponsoring employers in distress

Schemes must follow the Regulator’s protecting schemes from sponsoring employer distress guidance where the sponsoring employer is stressed – the Regulator will check up on schemes in respect of which it has concerns.

Key risks and Regulator expectations

As with previous annual funding statements, group tables set out the key risks and Regulator expectations on covenant, investment and funding based on scheme characteristics, employer strength, funding levels and maturity. There are five scheme types, each one split into two sub-categories dependent on maturity. Trustees should identify the group nearest the scheme’s characteristics and set a recovery plan that balances “affordability with other reasonable uses of cashflow for the employer.”


The AFS provides a clear steer of what the Regulator expects for all types of schemes. It may well investigate cases where its expectations are not met, and trustees and employers should be prepared to justify their approach with supporting evidence. Although the AFS is primarily aimed at Tranche 18 schemes (and others conducting funding reviews) all schemes will find the AFS useful given it sets out the current thinking of the Regulator on scheme funding (and by this time next year we may well have the first statement under the revised funding regime).

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