The Pensions Regulator (TPR) issued its Annual Funding Statement last week (the Statement). This is aimed at trustees and sponsoring employers of occupational defined benefit (DB) schemes and, in particular, those schemes which have valuation dates between 22 September 2023 and 21 September 2024. 

The Statement firstly notes the turbulent market conditions over the last few years, which may have had an impact on DB schemes’ funding and investment allocations.  As such, TPR recommends that trustees should understand the magnitude of the impact on their schemes and, where significant, should review their funding and investment strategies, even if they do not have a valuation falling in the period mentioned above. 

The key messages from the Statement are:-

  • Overall most schemes have had an improvement in funding levels, with half expected to exceed their estimated buy-out funding levels.
  • Where funding levels have improved significantly, TPR suggests that trustees consider whether continuing with the existing strategy and level of risk is in the best financial interests of members, rather than supporting an investment strategy that is aligned with their future plans for the scheme. 
  • There are still a sizable minority of schemes expected to be in deficit on a technical provisions basis. TPR recommends that these trustees continue to focus on achieving a recovery plan that is as short as reasonable, based on the employer’s affordability and to give careful attention to the employer covenant.

Other points of interest to note from the Statement are as follows:-

  • TPR is clear that "It would be good practice for trustees to consider the steps they can take now to align (even if broadly) with the funding code when it is published, and to avoid having to make significant changes at the next valuation to be compliant." 

I.e. trustees should not be resting on their laurels awaiting publication of the DB Funding Code, they should be reviewing and taking action just now where appropriate. This would suggest that TPR is not expecting that the the Code will deviate much in terms of overall TPR messaging from the DB Funding and Investment Strategy Regulations and this Statement.

  • TPR has noted that "We know schemes are increasingly facing calls from employers to reduce or suspend contributions, as well as from members for discretionary increases, given that pension increases may not have kept pace with inflation. When considering such requests, trustees should look at their overall position, the resilience of their investment strategy to future financial market movements, and the level of covenant support. Trustees should be aware of members who would benefit from any decision to award a discretionary increase, and whether their scheme has a history of paying discretionary increases."

This goes hand in hand with current industry-wide focus on the somewhat surprising conundrum that has come back round again of what to do with DB scheme surpluses (following the “Options for DB Schemes” consultation and the recent Work and Pensions Committee report which looked at surplus and consideration of using it to augment members’ benefits). It follows recent industry sentiment that as part of any surplus considerations, trustees should be looking at their scheme’s precedent for awarding members discretionary pension increases. 

  • TPR is also clear that Trustees should be factoring in climate change and wider sustainability issues when looking at scheme horizons, and their possible long-term covenant, investment and funding strategies. Particularly for those DB schemes that have TCFD obligations to comply with. 
  • TPR are positively encouraging trustees to consider all options for their scheme and not just accept the “status quo”. So it is good to see that they are encouraging flexible approaches and innovative solutions – see immediately below. It is hoped that this will also be reflected in the DB Code when its finally published. 
  • TPR has indicated that it intends to publish guidance on DB alternative arrangements for consolidation later this year.

Finally, the Statement notes that the new DB Funding and Investment Strategy Regulations and the revised DB Funding Code are expected to apply to valuations with effective dates from 22 September 20024. It confirms that they will publish the revised DB Fund Code over the summer, along with supporting documentation and a consultation on an updated covenant guidance. 

Whilst the Statement has been broadly welcomed by the industry, it is becomingly increasingly keen to see the DB Funding Code which is really the most fundamental outstanding part in relation to the full package of DB Funding documents and guidance. Whilst the Statement seems to reflect the general direction towards more flexibility and innovation for DB schemes and their funding and investment approaches, the DB Funding Code is now key in order to see how the overall picture all fits together. 

If you would like to discuss this in more detail, please do get in touch with your usual Burges Salmon pensions contact or Clive Pugh, Pensions Partner.