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Annual funding statement 2015

Ref: PN15-23
Friday 22 May 2015

The Pensions Regulator today published its 2015 annual funding statement, setting out its analysis of current market conditions and how sponsoring employers and trustees of defined benefit (DB) pension schemes can agree appropriate funding plans which protect members’ benefits without undermining the sustainable growth of the employer.

View the annual funding statement and supporting analysis and evidence.

The statement acknowledges that many schemes are likely to experience larger deficits than at their last triennial valuation due to changing market conditions.

Schemes with capacity to take additional risks should be able to address higher deficits through appropriate changes to their funding strategy – such as a modest extension to their recovery plans, a modest increase in deficit repair contributions and/or changing their assumptions relating to investment returns.

Other schemes with less capacity to take risk should seek higher contributions with a view to maintaining the same recovery plan end date – where this is affordable to the sponsor without adversely impacting its plans for sustainable growth. Where constrained affordability results in lower deficit recovery contributions than trustees think the scheme needs, they should maintain a higher level of due diligence and put in place strategies for managing the risks to the scheme.

Stephen Soper, executive director for DB at The Pensions Regulator, said:

"Our annual funding statement should give confidence to employers that supporting DB schemes is not a barrier to investing in their business, and that for trustees, taking an integrated and proportionate approach to managing risks can help a scheme improve its own situation over the longer term.

"The strong performance of all asset classes during improved economic conditions have benefited pension funds. But persistent low interest rates and falling gilt yields mean that it remains a very challenging environment for DB schemes with 2015 valuation dates. Scheme trustees that have followed the DB code and have assessed their options with their employer should be in a better position to cope with these changes in market conditions.

"The DB funding regime is designed to be sufficiently flexible to enable trustees and employers to agree funding strategies which meet the scheme’s funding requirements without compromising the ability of the employer to invest in their business and support the scheme in the long term."

The regulator will be continuing its approach of selecting a number of schemes for proactive engagement ahead of their valuations being submitted. It has already contacted all the schemes with valuation dates between September 2014 and September 2015 (Tranche 10) selected for proactive engagement.

As part of its work to help trustees understand the DB funding code, the regulator is planning to publish, in the coming months, practical guidance on assessing the sponsoring employer’s ability to support the scheme (covenant), an integrated approach to managing risk, and setting an investment strategy.

Editor's notes

  1. This year’s annual statement is relevant for trustees and employers of all defined benefits (DB) pension schemes but is primarily aimed at those undertaking valuations with effective dates in the period 22 September 2014 to 21 September 2015 (2015 valuations).
  2. Alongside the statement, the regulator has also published 'Scheme funding analysis: A look forward to schemes with valuation dates between September 2014 and September 2015 (Tranche 10)' and 'Scheme funding analysis: A review of valuations and recovery plans for scheme with valuation effective dates in the period September 2012 to September 2013 (Tranche 8)'.
  3. The Pensions Regulator is the regulator of work-based pension schemes in the UK. We have objectives to: protect members’ benefits; reduce the risk of calls on the Pension Protection Fund (PPF); to promote and to improve understanding of the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only).

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