July 14, 2021

Pensions Regulator’s Annual Funding Statement: Key Messages for Employers


The Pensions Regulator has published its annual funding statement for occupational defined benefit (“DB“) pension schemes.   The statement is relevant for trustees and employers making decisions on scheme funding. It provides wider guidance on covenant monitoring due to the impact of COVID-19 and climate change risks. It highlights the need for employers to provide detailed financial projections to assist trustees in understanding the impact of COVID-19 and in managing future unexpected events.


Aimed at schemes with valuation dates between 22 September 2020 and 21 September 2021 as well as schemes undergoing significant changes that require a review of their funding and risk strategies.


Confirmation that current valuations will be regulated under existing legislation and guidance as the new DB funding code of practice is not expected until late 2022.

Key messages

  • Contingency planning – stress testing or scenario planning for possible future economic environments should be considered particularly for schemes experiencing any continued material impact caused by COVID-19.
  • Post-valuation experience – can be considered but where allowance has been made for positive post-valuation experience the expectation is that any material negative post-valuation experience will be considered in future valuations.
  • Mortality – uncertainty relating to COVID-19, including that the long-term impacts will take time to emerge, is noted. If the decision is made to materially weaken existing mortality assumptions trustees should consider putting in place monitoring and contingency plans if those revised assumptions are not met in practice.
  • Affordability and deficit recovery contributions – where employers continue to request liquidity support through reduced contributions, trustees are expected to obtain suitable mitigations which, could include; all dividends to stop, equitable treatment of the scheme with other creditors and covenant enhancing measures i.e. security or guarantees.
  • Managing risk, including climate risks – continued focus on integrated risk management (IRM) of the employer’s covenant, investment risks and scheme’s funding plans. The impact of climate change on IRM should be proactively considered. The Regulator will be looking at disclosures in the statement of investment principles and implementation statement to monitor climate change activity.
  • Corporate activity – based on the expectation that there will be an increase in corporate activity as the recovery from COVID-19 progresses, trustees should be prepared and ready to act. To facilitate this, employers are expected to inform trustees early and to keep them informed. Employers should also note that trustees are expected to take a rigorous approach and to negotiate mitigation where relevant whether a valuation is underway or not.


While the Regulator is clearly sympathetic to the challenges posed to employers and trustees by COVID-19, there is a clear expectation to address these, and the climate change obligations, through clear and measurable contingency plans.

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