The Pension Regulator’s latest Annual Funding Statement covers a lot of ground, emphasising the need for trustees to determine how their covenant has been impacted by Covid-19 and Brexit and to assess whether they are on track to reach their long-term funding target.

Where a recovery plan is needed, affordability remains a key consideration and, where this is constrained, the Regulator expects trustees to seek appropriate mitigation, such as contributions increasing in future by reference to well-defined triggers and contingent security being put in place. Conversely, the Regulator expects a ‘business as usual’ approach where the employer covenant remains strong and, where employers have prospered, it expects recovery periods to be cut rather than deficit recovery contributions (DRCs) reduced.

The statement is aimed at trustees and sponsoring employers of occupational defined benefit (DB) pension schemes. It is particularly relevant to schemes with valuation dates between 22 September 2020 and 21 September 2021 (known as Tranche 16, or T16 valuations). It is also relevant to schemes undergoing significant changes that require a review of their funding and risk strategies.

Key takeaways

  • While the Regulator expects trustees to take account of the impact of Covid-19 and Brexit on their employer covenant and scheme, it does not want this to be used as a reason to weaken existing recovery plans where this is not justified.
  • Where affordability is constrained, the Regulator expects trustees to seek appropriate mitigation and to ensure that their scheme is treated equitably compared with other creditors and shareholders.
  • Trustees should take care when reviewing mortality assumptions, recognising that there is a great deal of uncertainty over the impact of Covid-19 on future mortality rates.
  • Where schemes take account of post valuation experience this should include negative as well as positive events.
  • Although it is not yet a legal requirement, the Regulator encourages trustees to develop a long-term funding target, and agree it with their employer, if they do not already have one.

Funding positions generally

The Regulator’s analysis indicates that over the three-year period to March 2021, in aggregate, the funding levels for T16 schemes on their technical provisions (TPs) basis has improved. However, the position for individual schemes may vary greatly depending on inter-valuation experience, valuation dates, funding assumptions and investment strategies.

Where schemes have strayed from their expected funding position and their longer-term target the Regulator expects trustees and employers to develop strategies to put them back on course. Where schemes are now better funded on a TPs basis than was anticipated, or even in surplus, it encourages trustees to remain focused on their longer-term target and their journey towards it.

Valuation assumptions


The Regulator’s understanding is that, for most schemes, the immediate impact from actual mortality experience over the period to a scheme’s valuation date is relatively low and, in any event, this will be accounted for in the valuation data. Some schemes may also want to allow for known mortality experience over the period since the effective valuation date to the date of signing the valuation.

As regards future experience, the Regulator recognises that there are differing views on the impact the pandemic will have on future mortality for pension schemes. Given this uncertainty the Regulator suggests that schemes should undertake scenario planning. Trustees should also recognise that any view they take now on future mortality may fail to materialise, and they should plan accordingly.

The Regulator suggests that one way to capture the uncertainty from recent events may be to retain a mortality assumption similar to previous valuations and if evidence for different assumptions emerges, any savings from these can be recognised at future valuations.

It also considers it reasonable for schemes to use the latest base mortality tables and projections available, suitably adjusted for scheme experience where appropriate. Consideration will also need to be given to the weighting given to recent events in these models.

Overall, where trustees wish to make amendments to their mortality assumptions, there should be justification to support this. If trustees decide to weaken mortality assumptions materially from those adopted previously, they should consider whether monitoring and contingency plans should be put in place in the event that the revised assumptions are not borne out in practice.


Given the planned reform of RPI from 2030 the Regulator expects trustees to choose their inflation assumptions carefully where pension increases are linked to inflation. Where adjustments to market-implied inflation measures are considered appropriate, these will need to be consistent with the scheme’s exposure to inflation within their investment strategy.

Post valuation experience

When preparing recovery plans, trustees can consider taking account of post valuation experience. However, the Regulator expects this to include negative as well as positive events. The Regulator also expects trustees who have previously allowed for positive post-valuation experience to also consider any material negative post-valuation changes at future valuations.

With regards to employer affordability, the Regulator makes clear that it would usually expect any changes arising from factoring in favourable post-valuation events to reduce the length of the recovery plan rather than the level of annual payments.

In any event, trustees should have a credible justification for the assumptions chosen and be content that the plan is appropriate and in members’ interests. If conditions later deteriorate, the Regulator considers that it may be necessary to conduct an inter-valuation review or advance the next valuation.

Investment considerations


With the majority of schemes now closed to new members and gradually maturing, the Regulator expects trustees to actively monitor and mitigate their liquidity risks alongside other risks such as diversification. Analysis should be proportionate to the scheme. However, the Regulator expects more robust liquidity risk analysis to include:

  • stress testing for adverse simultaneous market shifts
  • the extent and composition of derivatives exposure to margin/collateral calls, and
  • review of the assumptions that might apply in times of severe market stress and the impact they might have on the ability of assets to be liquidated and the values that might be realised.

Covenant considerations

Covenant assessments

The impact of Covid-19 on businesses supporting pension schemes has varied, with the employer’s business sector being a key factor.

The Regulator expects trustees to consider obtaining independent specialist advice to support covenant assessment, particularly, if:

  • the covenant is complex
  • the outlook for any COVID-19 related recovery is unclear
  • Brexit implications appear significant
  • the covenant is deteriorating, or
  • the scheme has a high degree of reliance on the covenant, for example because it has a large deficit or a high level of investment risk.

Where employers are experiencing corporate distress or acute, near-term affordability restrictions trustees should ensure they are familiar with the Regulator’s protecting schemes from sponsoring employer distress guidance.

Affordability, DRCs and covenant leakage

Trustees will need to take a view on their employer covenant and how it has been impacted by Covid-19 and Brexit, as this will inform their approach to their current valuation.

Where external developments such as these have had a limited impact on the employer’s business, the Regulator expects trustees to take a ‘business as usual’ approach to setting recovery plans. This means it would not generally expect DRCs to be reduced or recovery plan end dates to be extended. Where employers are reporting strong cash flow generation, the Regulator expects trustees to try and reduce the length of recovery plans, especially where they are long and where there are concerns the scheme is being treated inequitably relative to other stakeholders.

Where the initial impacts were material but trading is recovering, there could be some short-term affordability constraints. Trustees should carefully consider any requests to accept a lower level of contributions. The Regulator expects any such request to be short term, with higher contributions in subsequent years limiting any extension to recovery plan end dates. Where the employer has recommenced, or continued to make shareholder distributions, the Regulator will view this as being inconsistent with the scheme having to agree lower contributions. The Regulator also expects any deferred DRCs to be repaid under such circumstances, ideally before any shareholder distributions recommence.

The Regulator reports that to date only a small proportion of employers have asked to suspend or reduce DRCs. In line with its previous guidance where employers continue to request liquidity support from the pension scheme through DRC deferrals and/or lower ongoing DRCs as part of a revised recovery plan, it expects trustees to obtain suitable mitigations.

The Statement notes that the Chancellor’s March 2021 Budget statement announced a 130% super-deduction capital allowance for tax purposes from 1 April 2021 until 31 March 2023, and an increase in Corporation Tax to 25% in 2023. Consequently, it is possible that some employers could request to defer DRCs over the short term to take advantage of and/or accommodate these changes. In such circumstances, the Regulator expects trustees to treat any request for lower or deferred DRCs in line with its COVID-19 guidance and the expectations set out in the Annual Statement.

The Regulator continues to expect trustees to be vigilant of employer covenant leakage. Where trustees believe covenant leakage is not justified, it expects them to seek suitable protections to compensate their scheme for the resulting deterioration in covenant – particularly for schemes with weaker covenants and longer recovery plans.

Covenant monitoring and contingency plans

The Regulator is pleased that most trustees have increased the frequency and intensity of covenant monitoring as a result of the pandemic. It considers this to be good practice and encourages trustees to continue with it, warning against reducing the frequency too early.

Where the monitoring identifies adverse changes in the covenant, trustees should have in place contingency plans to enable them to react appropriately.

Corporate transactions

The Regulator is expecting an increase in corporate activity levels as the recovery progresses. It expects trustees to take a rigorous approach to assessing the impact of any corporate transactions and to negotiate mitigation (where relevant) to protect the interests of members and ensure fair treatment with other creditors. The Regulator expects trustees to be informed of any corporate activity early in the process, to be provided with the same level of information as other stakeholders, and to ‘get a seat at the table’ during negotiations.

Trustees should be prepared to evidence how such scenarios have been managed and that any outcome sufficiently mitigates any detriment.

Climate change

The Regulator continues to expect trustees to focus on integrated risk management. Climate change should be considered as part of this as climate change considerations may impact on the assumptions used in actuarial valuations, the investment strategy and the sponsor covenant.

The Regulator will be using scheme’s statements of investment principles and implementation statements to monitor how trustees are using scenario analysis, stewardship and engagement activities to identify and manage climate change risks.

Long-term funding targets

Where a scheme has a long-term funding target (LTFT) in place the Regulator expects the trustees to continue to focus on their LTFT with suitable short-term modifications, where necessary, to take account of the impact of economic conditions on the scheme and sponsor. The Pension Schemes Act 2021, once implemented, will make it a legal requirement for schemes to have a specific long-term strategy designed to deliver an agreed long-term objective. However, the Regulator encourages trustees to consider developing an LTFT, and agreeing it with their employer, if they do not already have one.

Key risks and actions trustees and employers should focus on

In recent years, the Regulator has summarised the key risks it expects trustees to focus on and features of the funding plans it expects them to develop in a series of tables segmented by funding strength, covenant and scheme maturity. The tables included in this year’s statement are consistent with those we published last year, with no material changes.

New DB funding code

Finally, the statement confirms that the Regulator expects to publish the second part of its consultation on the new funding code towards the end of 2021 once the DWP has published the draft regulations which will underpin this. It does not expect the new code to come into force until late 2022 at the earliest.


The latest Annual Funding Statement addresses the key issues that trustees of T16 schemes will need to consider when preparing their valuation, recognising that the impact of these factors will differ depending on the particular experience of a scheme and sponsor since the last valuation. While the statement recognises the need for flexibility where the position of an employer has deteriorated, it is clear that the Regulator does not want recovery plans to be extended without justification where external factors have had a limited (or even beneficial) impact on an employer’s fortunes. The Regulator also wants schemes to keep their long term objectives in mind notwithstanding any short term challenges they or their employer may be facing.

As ever, trustees and employers should be fully prepared to justify and explain the approach they take (in light of the Regulator’s statement) with suitable supporting evidence.

Contact us

If you have any queries about any of these developments speak to your usual HSF adviser or contact a member of our pension disputes team.

Samantha Brown
Samantha Brown
Head of Employment, Pensions and Incentives, London
+44 20 7466 2249

Rachel Pinto
Rachel Pinto
Partner, Pensions, London
+44 20 7466 2638

Michael Aherne
Michael Aherne
Partner, Pensions, London
+44 20 7466 7527









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