Alexa Mitterhuber, Director of Defined Benefit Solutions at Standard Life: “The new DB Funding Code was an important step towards establishing a stronger set of standards around funding and investment requirements, and it’s encouraging to see that The Pensions Regulator now expects many schemes to shift their focus away from deficit recovery towards endgame planning in the current environment of improved funding levels. While many schemes may find themselves in a position of surplus, barriers to endgame still remain. Our research shows that half (46%) of DB Trustees cite market volatility as the single biggest challenge to pursuing their endgame strategy, and over a quarter (28%) of Trustees cite preparation as a key barrier to derisking. Insurance can play a crucial role in providing de-risking solutions to support schemes in meeting their endgame strategies. For schemes in this position, careful preparation, and working closely with advisers and insurers can help address many of these challenges. Steps such as conducting a feasibility study, updating and maintaining the quality of scheme data, and engaging key stakeholders such as the scheme’s sponsor or administrator will all help ensure a smoother transition and successful journey to buy-in or buy-out.”
Helen Forrest Hall, Chief Strategy Officer at the PMI, comments: “It is good news that DB scheme funding positions are healthy, with 74% in surplus on a low dependency basis and TPR expects 80% of schemes to be able to meet the criteria for Fast Track with the reduced scrutiny and regulatory burden that comes with this. It's also welcome that TPR has used the opportunity of the AFS to clarify some of new requirements under the Code particularly around proportionality. At the same time TPR is right to point out the heightened trade and geopolitical risk facing schemes and employers and the need for trustees to consider the impact on investment strategies and covenant.”
Stewart Hastie, ACA Chair, comments: "New endgame guidance is promised and TPR is expected to have a major role in helping schemes navigate new surplus flexibilities anticipated in the forthcoming Pensions Bill. Let’s hope TPR can move a lot quicker than the Funding Code in releasing new guidance on surplus that brings the right balance between protecting members benefits and reckless prudence that holds back economic growth and better outcomes. Much of the annual statement focuses on clarifying aspects of the ‘new’ funding regime - notably the largest component is given over to clarifying the lengthy covenant guidance finally released late last year and ensuring it is applied proportionately given three quarters of schemes are in a position of “low dependency” on their sponsor (under TPR analysis).”
David Hamilton, Chief Actuary at Broadstone said: “Whilst TPR warns about ongoing risks and geopolitical uncertainty, the overall message is that most schemes are now very well placed. There is talk of planning for the potential release of surplus, but also a word of warning for those considering run-on - reinforcing the ongoing risks and governance requirements that will make this unrealistic for most smaller schemes. In terms of surplus extraction, we await with interest how the government will balance their desires for productive finance investment and protection of members’ interests in the upcoming Pensions Bill. The key takeaway from the Annual Funding Statement is the further evidence that the long gestation period of the new funding regime meant it has arrived too late to be of benefit to most schemes. Three quarters of schemes are expected to already be in surplus on a low dependency basis and the statement acknowledges that, for instance, these schemes will only need ‘proportionate’ covenant assessment. Whilst proportionality is referred to on almost every other page, the volume of additional work under the new funding regime does feel excessive when the masses of guidance around affordable cash flows, reliability periods etc., are likely to apply to only a small minority. The further clarifications within this statement around some of the covenant expectations also demonstrate how one size does not fit all and highlight the potential gulf between best practice aspirations and a pragmatic, risk-based, proportionate approach.”
Arabella Slinger, Partner and Head of Covenant at XPS Group said: “The 2025 AFS does not contain any surprises but highlights the relevance of covenant throughout a scheme’s journey, including in formulating an endgame strategy, as well as for schemes that have elected to go down the Fast Track route or have already reached low dependency. We appreciate the further clarification on the application of the funding code and covenant guidance and we look forward to helping our clients navigate TPR’s endgame guidance and the upcoming Pension Schemes Bill which is expected to provide clarification on the potential release of surplus.”
TPR publish first AFS under the new DB funding code
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