UK Pensions Update: Pensions Regulator Issues First Annual Funding Report under New Funding Regulations
In a significant move, the Pensions Regulator (TPR) has announced updates to the DB funding code and covenant guidance, focusing on endgame planning, surplus extraction, and long-term scheme objectives. The changes, outlined in the Regulator's annual funding statement for private sector DB schemes in April 2025, aim to provide a proactive, balanced, and documented approach to funding strategy, covenant assessment, and surplus management.
The updates highlight the importance of trustees taking a collaborative approach with their advisers throughout the valuation process. Trustees are also expected to have documented policies regarding their long-term goals and endgame strategies, including clear options for surplus management. This shift reflects the growing variety of viable endgame models beyond buyout, such as run-on or hybrid approaches.
Trustees of well-funded DB schemes will now be allowed to release surplus funds back to employers or enhance member benefits when it is considered "safe to do so," with the minimum funding level likely set at full funding on a low-dependency basis. This move aims to unlock around £160 billion in surplus for reinvestment and productivity boosts.
However, trustees must carefully balance the objectives of managing assets to pay pensions, maintaining full funding security, and safely releasing surplus under a framework agreement with sponsors. This includes preparing for contingent events and improving member security.
There is increased regulatory focus on covenant strength and scrutiny, reflecting changing legislative and market conditions. Trustees and employers must remain vigilant and responsive to evolving risks such as cyber threats and ESG considerations.
The Pension Schemes Bill, which will address legislation regarding the release of surplus, is expected in the near future. Until then, trustees should follow existing legislation and have a policy for potential surplus release.
The Regulator groups schemes into three broad funding level categories based on the new DB funding code: above low dependency, above technical provisions but below low dependency, and below technical provisions. The Regulator expects a shift from deficit repair to endgame planning for more than three-quarters of schemes fully funded on a low dependency basis.
The Regulator's updated covenant guidance should be referred to when assessing and monitoring the employer covenant. The importance of the employer covenant remains integral when assessing the level of supportable risk within a scheme's journey plan, particularly for poorly funded, large schemes, or those taking significant levels of risk.
Climate change and wider sustainability issues are 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 Regulator no longer intends to publish a supportable risk formula, adopting a principles-based approach instead. Around 80% of schemes can adopt the lighter Fast Track approach to their valuation, providing reduced detail in terms of evidence and explanation.
The statement is particularly relevant to schemes with valuation dates between September 22, 2024, and September 21, 2025, known as Tranche 24/25 or T24/25. The Regulator plans to publish new guidance on a well-funded scheme's endgame strategy over the coming weeks.
In summary, the 2025 DB funding code update centres on trustees taking a proactive, documented, and balanced approach to long-term funding strategy, covenant assessment, and surplus management, within an evolving regulatory framework designed to unlock surplus funds safely and support member security. Further guidance on endgame planning will be published in early summer. Trustees are encouraged to engage early in the valuation cycle with their advisers and stay engaged with TPR consultations and adapt governance and funding strategies accordingly.
- In light of the new DB funding code updates, trustees are advised to collaborate with their advisers and have documented policies for long-term wealth-management goals and endgame strategies, which should include surplus management strategies in finance and business.
- The shift from deficit repair to endgame planning, as a result of the updates, leads to the potential release of surplus funds for reinvesting, which could provide productivity boosts, as well as improve member benefits in personal-finance.
- The growing emphasis on covenant strength and scrutiny by regulators, highlighted in the DB funding code changes, has a significant impact on business operations, with trustees and employers needing to be vigilant and responsive to evolving risks such as cyber threats, ESG considerations, and changes in the industry.
