UK Pensions Briefing | Pensions Regulator publishes its first Annual Funding Statement under the new funding code

The Regulator’s annual funding statement for private sector DB schemes was published on April 29, 2025. It is the first such statement since the new DB funding regime came into force from September 22, 2024, onwards.  

The statement and the accompanying analysis paper are particularly relevant to schemes with valuation dates between September 22, 2024, and September 21, 2025, now known as Tranche 24/25 or T24/25 to reflect the calendar year. However, the statement should be read by all DB scheme trustees as it captures some key information on various aspects of the new DB funding code and the updated covenant guidance.

The Regulator’s key messages

The 2025 statement conveys the following key messages from the Regulator:

• Most schemes remain in surplus; 85 per cent on a technical provisions basis; 76 per cent on the ‘Regulator-derived low dependency basis’ (the funding and investment method encouraged by the Regulator that aims to reduce reliance on future employer contributions); and 54 per cent on a buy-out basis.
• The overall improvement in schemes’ funding positions underpins the Regulator’s expectation that most schemes should be shifting focus from deficit recovery to endgame planning.
• Despite schemes’ healthy funding, the Regulator warns that trustees should not lose sight of increased global market volatility and geopolitical uncertainty. It expects trustees to understand any resultant risks to both their scheme’s investment strategy and the underlying employer covenant.
• The statement acknowledges the increased interest in potential release of scheme surpluses. Trustees should contemplate their future approach to any request from the employer regarding surplus release and the Regulator suggests that it would be good practice for trustees to start developing a policy for such a scenario.

Scheme valuations under the new funding regime

The Regulator expects around 80 per cent of schemes to be able to adopt the lighter Fast Track approach to their valuation. This means they can provide reduced detail in terms of evidence and explanation in the statement of strategy, with a lower chance of the Regulator engaging with the scheme. The Regulator says it will be “risk-based and outcome-focused” when deciding which schemes require its further involvement. For T24/25, the Regulator does not intend to make any changes to the Fast Track parameters published in November 2024, although these will be kept under review.

The Regulator is due to launch a new “Submit a scheme valuation” digital service along with its response to the statement of strategy consultation in the coming weeks. Although trustees are not expected to delay the completion of their valuation, the Regulator will not expect submission of the new statement of strategy and other valuation documents until this service is live. Delays during this period will not be penalised for late compliance.

As the new funding regime requires the valuation process to be more integrated, trustees must work collaboratively with their advisers throughout the process. As there are now different considerations for trustees under the new framework, the emphasis is on engaging early with advisers.

Covenant assessment

Having published new covenant guidance in December 2024, the Regulator provides further clarification in Appendix 1 to the statement. More detail is provided on issues including:

• Taking a proportionate approach to covenant assessment when reliance on the employer is low.
• The role of covenant longevity in assessing the scheme’s journey plan to low dependency.
• How to assess the reliability period independently of scheme funding needs and when cashflow is limited or negative.
• The difference between the two cash measures: maximum affordable contributions (used for assessing supportable risk, alongside contingent asset support) and employer’s available cash (used for assessing reasonable affordability for recovery plan purposes).
• The role of covenant longevity in setting a journey plan to low dependency.
• Why a PPF standard guarantee is not considered a “look through” guarantee.

Supportable risk

The Regulator no longer intends to publish a supportable risk formula, given the principles-based approach adopted in the DB funding code. It recognises the need for schemes to approach an assessment of supportable risk based on the specific merits of the scheme and the employer. Appendix 2 to the statement provides more detail.

General considerations

In this section, the Regulator comments on several other issues, summarised below.

Endgame planning - With more than three-quarters of schemes now fully funded on a low dependency basis, focus needs to shift from deficit repair to endgame planning. By “endgame”, as well as considering insurance buy-out or transfer to a consolidator scheme, the Regulator has in mind running on the scheme as one of the options available. If schemes decide to run on, they will need to weigh the benefits against the ongoing risks and put in place suitable monitoring and management strategies. They will also need to continue monitoring the employer covenant to ensure it continues to provide the necessary support for the risks. Further guidance in this area will be published in early summer.

Supportable risk - The importance of the employer covenant remains an integral element to consider when assessing the level of supportable risk within a scheme’s journey plan. This is particularly key where schemes are poorly funded, large in comparison to the size of the employer, or taking significant levels of risk.

Economic uncertainty - Trustees should be alive to the fact that scheme investments and employer covenants can be impacted in different ways by macroeconomic uncertainty. Uncertain future interest and inflation rates, together with volatile stock markets mean trustees should ensure their short-term liquidity requirements can be met while their long-term investment strategy continues to reflect the changing economic landscape.

Release of surplus – Legislation is expected in the upcoming Pension Schemes Bill but until then, trustees should follow existing legislation when considering options in respect of scheme surplus. Nevertheless, it is good practice for trustees to have in place a policy for the potential release of surplus and to discuss how they would approach any such requests from the employer.

Funding strategies

As in previous statements, the Regulator has grouped schemes into three broad finding level categories, adapted for the new DB funding code.

Some final takeaways

In getting to grips with the new regime, trustees should engage early in the valuation cycle with their advisers as the Regulator expects a collaborative approach.

The level of reliance on the employer covenant at this point of the scheme’s journey plan will directly affect taking a proportionate approach in assessing and monitoring the employer covenant. Trustees should refer to the Regulator’s updated covenant guidance. 

Climate change and wider sustainability issues continue to be a concern and trustees should work with the employer and their advisers to understand potential implications for the employer’s business and thus for their scheme. The statement refers to the climate-related governance and reporting guidance. 

Focus should now shift to a well-funded scheme’s endgame strategy. Watch out for the Regulator’s planned new guidance on this topic over the coming weeks. 

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.