The Pensions Regulator’s (TPR) Annual Funding Statement 2025 (the AFS) is the first under the new defined benefit (DB) funding code of practice.
Article / 15 May 2025
TPR’s Annual Funding Statement 2025 – what are the key messages for trustees?
Insight shared by:
The AFS is directed at schemes producing valuations with effective dates between 22 September 2024 and 21 September 2025 or that need to review their funding and investment strategies. However, it is relevant to all DB schemes because it covers important points from the new funding code and TPR’s updated December 2024 employer covenant guidance.
It is set against a backdrop of continued improved scheme funding with 31.12.24 figures showing that 85% of schemes had a technical provisions (TP) surplus, 75% a low dependency surplus and 54% of schemes were in surplus on a buyout basis.
The AFS outlines TPR’s expectations in the current environment, guiding trustees on how to approach their first valuation under the new framework and including valuable clarification on the covenant assessment and supportable risk test.
Five key messages
Key message 1: Schemes with improved funding positions should be shifting attention from recovering deficits to endgame planning.
Key message 2: Trustees should be mindful of the impact that the ongoing increase in trade and geopolitical insecurity is expected to have on funding, investments, and employer covenant. Risks will include those relating to interest rates, inflation and global economic growth.
Key message 3: Around 80% of schemes are estimated to meet the Fast Track regulatory filter parameters. Fast Track parameters for T24/25 will remain the same as those from November 2024.
Key message 4: TPR reiterates that it will be “risk-based and outcome focused when deciding which schemes to interact with”.
Key message 5: Engage early with the new valuation process and with the employer and advisers.
General considerations – this section covers several issues
| Consideration | Key trustee actions |
|---|---|
| Valuation under new regime |
The valuation process requires more integration of actuarial, investment and covenant and requires detailed information for the statement of strategy meaning early and effective engagement with the process and advisers is required. TPR confirms that the statement of strategy accommodates flexibility in setting the long-term objective, allowing for the inclusion of specific plans such as achieving buyout after reaching low dependency by the relevant date. Whether or not an intention to buy-out should be included will depend on whether the “commitment…is clear and settled enough…”. |
| Covenant | TPR highlights the importance that covenant has in assessing supportable risk in the journey plan, particularly for poorly funded schemes, those that are large compared to the employer or take significant risk. |
| Continued macroeconomic uncertainty | This means that trustees must ensure that short-term liquidity and cash flow requirements are met, while considering volatility within the long-term investment strategy. |
| Operational processes | These should be ‘robust and effective’ so that they can withstand market shocks and support acceptable risk levels. |
| ESG | Trustees should continue adviser and employer liaison on climate change and other sustainability matters. TPR also notes for the first time that artificial intelligence adoption and energy transition may affect investment and covenant. |
| Distribution of surplus | Having a policy on surplus release is good practice as is trustees considering how they might respond to an employer request for surplus release. |
Funding strategies – guidance based on three different groups of schemes
TPR has retained the same three groupings as in the 2024 AFS, adjusted for the new Code.
Group 1: Funding level at or above low dependency – focus on endgame
The focus for Group 1 schemes should be on the endgame.
Group 2: Funding level above TPs but below low dependency funding target – focus on low dependency
Make sure that the scheme continues to progress to low dependency by the relevant date.
Group 3: Funding level below TPs – focus on deficit recovery
Concentrate on eliminating the deficit as soon as the employer can reasonably afford. TPs should be in line with reaching low dependency by the relevant date.
Clarification on common covenant and supportable risk queries – the appendices
Frequent queries that TPR has received on employer covenant and assessing supportable risk during the journey plan are clarified in two appendices.
Appendix 1: employer covenant
Proportionate approach to assessment
TPR provides some useful pointers on what a proportionate covenant assessment looks like, and the steps involved.
- Understand current reliance. What reliability period is required for the employer to support the current funding and investment strategy?
- A less detailed approach may be appropriate where there is lower reliance on covenant.
- If the reliability period has no impact on risk levels, concentrate on identifying significant covenant risks that could affect available support.
- Scope of assessment: TPR suggests focusing on those parts of covenant that are most being relied upon.
- A proportionate assessment is needed whether or not Fast Track is adopted and even after reaching full funding on a low dependency basis.
Scheme funding needs and reliability period
The reliability period should be considered separately from funding needs – “no credit will be given to better funded schemes when assessing the reliability period…”. However, funding requirements are relevant for the assessment of maximum affordable contributions and are also relevant for deciding what is proportionate when assessing the reliability period.
Assessing reliability period when cashflows are limited/ negative
Consideration should be given to cash flow certainty even where cash flows might be limited or negative.
Cash flow forecasts and defining the end of the reliability period
Step 1: understand whether cash flow forecasts are reasonable.
Step 2: also look at employer’s short to medium prospects and whether they allow reasonable certainty of cash flows after the forecast period.
PPF standard and ‘look through’ guarantees
TPR explains how trustees should treat a PPF standard guarantee under the new regime, noting that additional support or enhanced terms may be needed, or risk levels reduced where existing risk taken can no longer be supported by the guarantee under the new regime. However, TPR does not expect trustees to “seek an enhancement to existing contingent asset support where this is not required to support the level of risk within the scheme’s journey plan”. A guarantee that is triggered by employer insolvency or missed deficit repair contributions means that a maximum affordable contributions assessment should only look at the statutory employers’ cashflows.
Covenant ratings
Covenant ratings are being dropped going forwards for valuations, but TPR understands that they may still be used as a useful comparison or for transactional and Pension Schemes Act 2021 analysis.
Appendix 2: supportable risk
TPR is not setting a formula for assessing supportable risk, trustees will decide what risk is supportable based on the scheme and employer based on principles in the code.
Modelling for supportable risk over the reliability period
The supportable risk test should consider a downside event over the reliability period. As minimum, it should reflect downside event with a probability of one-in-six over the reliability period.
Stressing employer forecasts
It is not proportionate for trustees to ‘stress’ employer forecasts when assessing support for a scheme-related stress event.
Supportable risk when period to relevant date is shorter than reliability period
Because a scheme should be fully funded on a low dependency basis at the relevant date, this may mean that maximum risk levels may need to be reduced.
Actual scheme-related stress event midway through reliability period
TPR recognises that such an event could happen at any point during the reliability period and that it is not reasonable or proportionate to have to consider all possibilities.
What is yet to come?
TPR’s statement of strategy consultation response is expected to be published when it launches the new digital valuation submission service this Spring. Trustees should not submit their statement until this new service goes live and delay will not be regarded as a breach. TPR’s DB end game guidance should also be published in early Summer.