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Annual Funding Statement 2020

The Pensions Regulator's (TPR) Annual Funding Statement (AFS) is for trustees and sponsoring employers of occupational defined benefit (DB) pension schemes.

It is particularly relevant to schemes with valuation dates between 22 September 2019 and 21 September 2020 (Tranche 15, or T15 valuations), as well as schemes undergoing significant changes that require a review of their funding and risk strategies. It sets out specific guidance on how to approach the valuation under current conditions, what we expect from trustees and employers, and what they can expect from us. 

We appreciate these are very challenging times for many businesses as they deal with the effects of the COVID-19 pandemic. It is important for trustees and employers to work together to manage the immediate impact of COVID-19, but they should also make sure they retain a focus on the long term - most specifically around planning and risk management. The best support for a pension scheme is a strong employer, and we are here to support and provide guidance to businesses and trustees, and to ensure savers are protected.

Feedback from trustees and other practitioners was that the more targeted approach in our last statement addressing different segments of the landscape was particularly helpful. We have therefore reproduced the tables with the same format and content as last year and refreshed our messages to recognise the significantly different current conditions.

This statement also provides an update on some topical and recent issues (including COVID-19) and regulatory developments, which should have a bearing on pension scheme management, now and in the foreseeable future.

The analysis supporting this statement will be published in the summer and may not follow the same format or have the same contents as in previous years.

As the duration and impact of the current economic uncertainty evolves, we will consider issuing further guidance in the autumn.

Published: 30 April 2020

We expect all T15 valuations to fully incorporate the principles in our current DB code of practice and associated guidance. You should therefore read this statement alongside the following:

You should also read our COVID-19 guidance for trustees on DB funding and investment

Supplementary guidance aimed at trustees of smaller schemes with limited resources, highlighting the benefits of IRM and how to meet their main objectives through its application:

DB funding code consultation

The government’s March 2018 white paper, Protecting defined benefit pension schemes, set out a package of measures to improve trustees’ focus on long-term strategic thinking, and explained our intention to review and update our DB funding code as part of this initiative.

The new code will be clearer about funding approaches (in particular around the prudence of technical provisions (TPs) and appropriateness of recovery plans). We intend to introduce this after two formal consultations, supported by changes to legislation. The first of these, on the proposed principles and regulatory approach, has already commenced and was planned to run until June 2020, but we have announced a three-month extension until 2 September 2020 and will keep this under review. This will be followed by a business impact assessment to coincide with the second consultation to be published next year. We do not expect the new code to come into force until late 2021 at the earliest.

For the avoidance of any doubt, all T15 valuations will be regulated according to the requirements of the existing legislation and guidance.


Many schemes, regardless of whether they have a valuation in progress, will have been impacted by COVID-19 and should read our COVID-19 guidance.

At the time of writing, it is not possible to predict how long the current environment will continue, or what further impact it will have on pension schemes and the businesses supporting those schemes. We are continuing to monitor the situation and will issue further guidance as necessary.

We recognise that the ongoing uncertainty over COVID-19 will also bear heavily on the decisions trustees and sponsoring employers need to take over the next few months before their T15 valuations are finalised. This applies to short-term impact on businesses during the social restrictions, as well as the longer-term impact on the economy and the investment markets. The additional guidance in this statement deals with the key issues in connection with covenant assessments and affordability, scheme funding positions and designing recovery plans.

Funding positions generally

The T15 valuations are spread over dates between September 2019 and September 2020. Approximately 25% take place at dates around 31 December 2019, and a little over 50% take place at or near 31 March 2020. Funding positions usually vary depending on the exact valuation date - this year more so than others.

Our feedback indicates that at 31 December 2019 there was a general improvement in funding levels compared with three years previously, reflecting better than expected investment performance. Schemes that had hedged interest rate and inflation risks appeared to be above target while others were marginally below.

During the first quarter this year, UK equities fell sharply, mainly due to the initial impact of COVID-19. Global equites fell to a lesser extent. The yield on gilts also fell, as did the inflation expectations of investors in the gilts market.

Despite the unusually depressed market conditions at 31 March 2020, we do not anticipate the funding positions of all schemes to deteriorate to the same extent as the recent market reductions. This is because in recent years, pension schemes in general have de-risked considerably as they have become better funded and more mature.

Our research shows that funding positions at 31 March 2020 were very variable. Schemes with low exposure to equity markets and good levels of hedging remain above target or are marginally below, despite the market conditions. These are likely to be schemes that have managed their risks well, with sufficient resilience to withstand the current market conditions and the governance to react quickly. We encourage them to remain focused on their longer-term targets.

At the other end, a smaller proportion of schemes who were heavily exposed to equities and were not sufficiently hedged against interest rate risk have experienced a sharp fall in funding levels. If these risks were considered in an IRM framework, they should have contingency plans in place, which we expect to be implemented where possible. Where this is not the case, trustees and employers will need to consider how far they may have strayed from their longer-term objective and develop strategies to put them back on course.

Each scheme will need to consider its position individually depending on its own circumstances, and our guidance below is intended to equip trustees and employers with the essential tools to do so.

Scheme specific considerations

Post valuation experience

Our COVID-19 guidance states that we do not require schemes close to completing their valuations to take into account post-valuation experience to change their valuation assumptions. On the other hand, we expect trustees to consider it in their recovery plans, with a focus on the affordability of the employer. These schemes were likely to be highly advanced in their valuation process, and (unless they had a good reason) there was unlikely to be value in revisiting their assumptions at such a late stage with the additional work and analysis required.

Schemes with valuation dates around 31 December 2019 or earlier may already be well advanced with their provisional valuation results but have more time to complete their valuation. When preparing recovery plans, they should consider taking account of post valuation experience, especially the impact on the scheme's assets and liabilities of the significant changes in market conditions since the effective date of the valuation and the impact on the employer covenant. Post-valuation experience must be applied consistently, and this means taking account of positive and negative experience. In current conditions this is particularly relevant where trustees are also considering requests to take account of negative changes in the employer's affordability.

Changing the valuation date

Some trustees of schemes with effective valuation dates on or around 31 March 2020 may be concerned about the impact of what might appear to be unusual market conditions at that time. Some may be considering (or are being requested to consider) bringing forward the effective date of their valuation to a date when conditions were considered more normal (eg December 2019). Trustees should consider very carefully why they believe such an option is in the best interest of their members and the impact of any such change on member security, for example if the current conditions prevail for a long period. If they decide to change the valuation date they should do so having obtained and considered legal and actuarial advice, and consider taking account of changes in the investment markets and employer’s covenant since the new date of the valuation. Trustees who take this decision can expect us to question their reasons for the change.

Calculating technical provisions

March and April 2020 valuations will be challenging. Many trustees will not have sufficient information to form a reliable view on long-term future returns from their scheme's investments. Many will have similar issues in respect of the employer's covenant and affordability. It is therefore reasonable to delay taking decisions about TP assumptions until more clarity emerges.

It remains important for trustees to consider a range of possible future outcomes when considering their TP assumptions. These outcomes should consider the different paths for the economy to recover:

  • the rate at which recovery happens
  • the period over which it happens
  • whether it leaves any longer-term effects

Trustees should also discuss with their advisers the key assumptions in the models used by the actuary, and if they have or will change in the current environment. This will help enable trustees to understand the key underlying economic variables, how sensitive the valuation results are to different outcomes, and long-term effects. This will inform trustee decisions around discount rates and other assumptions, and make any adjustments to their long-term views, which should not be overly influenced by short-term fluctuations.

Trustees may find they are comfortable with the underlying assumptions and can work with a preliminary set of results. These can be refined during the valuation period as the trustees' confidence grows in reaching a view on future investment returns and other financial assumptions.

Many schemes already use scenario planning as part of their IRM framework to inform their decisions, to assess risks and to set up mitigation strategies. Many employers also use scenarios for their own business planning and aligning these with pension strategies should be beneficial. This process will take time and we encourage trustees to seek input from their advisers. Smaller schemes should explore with their advisers how this might be achieved in a cost-effective manner.

We expect schemes to proceed with as much of the preliminary valuation work as possible on preparing and validating the data, programming and the background analysis on the data. Our COVID-19 guidance highlights numerous aspects of current investment arrangements and governance, which trustees can also look to address.

Recovery plans and affordability

Trustees need to take a view on their employer's covenant at a time when many employers will have been significantly affected by COVID-19. The current circumstances accentuate the importance of trustees working collaboratively with their employer.

Trustees should carry out additional due diligence in accordance with our COVID-19 guidance to form their own assessment of the employer's covenant. Some businesses have continued to trade throughout the social restrictions. There will be varying degrees of impact on corporate health, from those experiencing only a partial deterioration in trade because they have been able to adapt or take up new opportunities (for example online sales), to others who have seen a complete shutdown of operations and total loss of income.

Trustees should then deal with any changes in pension deficits alongside the assessment they have made of the employer's financial position, and plan to recover deficits with a focus on the affordability of the employer while maintaining fair treatment and balancing of the sustainable growth of the employer.

In addition to deficit repair contributions (DRCs), where possible, we expect trustees to incorporate appropriate incremental increases in contributions, which track corporate health recovery, especially when the scheme has taken on additional funding risk while supporting the employer's recovery. Additional contributions should be based on appropriate triggers such as free cash flow and payments to other creditors.

Additional contributions could also be linked to investment performance. Where the investment return assumed in the recovery plan is more optimistic than the prudent view taken in the TPs, they should be mindful of the consequences for member security of this optimism not being borne out. They should therefore keep the matter under review and, if appropriate, consider underpinning the additional risk with contingent security or link additional deficit repair contributions (DRCs) to triggers based on investment performance.

Shareholder distributions

Many employers have either ceased all shareholder distributions (such as dividend payments) or significantly reduced them to preserve liquidity. We expect this to continue while employers rebuild balance sheets and invest in their recovery.

Where employers recommence shareholder distributions, we expect liquidity and affordability to have been largely restored and recovery plans to reflect that position.

In our COVID-19 guidance, we stated that trustees should be open to requests to reduce or suspend DRCs in line with the principles we set out. Where significant reductions in DRCs are agreed to support the employer, trustees should:

  • ensure that this additional liquidity is not used by the employer to support associated companies unless this will benefit the ability of the employer to support the scheme
  • agree contingent contributions to commence on the reintroduction of shareholder distributions and/or agree formal dividend blocks for the period of agreed reductions. This should be a properly documented, legally enforceable condition of the DRC reduction
  • understand how deferred contributions are to be repaid in line with any protections agreed

What we expect of trustees

Long-term funding targets

Paying the promised benefits is the key objective for all schemes. This requires trustees to look ahead and set clear plans for how the objective will be delivered and then manage its delivery within an IRM framework. Good practice we have observed among schemes that appear to do this well (see pages 156-7 of the DB funding cope of practice consultation (PDF, 2,306KB, 175 pages)) often involves trustees and employers agreeing a clear strategy for achieving their long-term goal, which recognises how the balance between investment risk, contributions and covenant support may change over time as the scheme gets better funded and more mature.

Typically, this leads to a long-term funding target (LTFT) being agreed between trustees and employers. The target would, for instance, be for the assets the scheme would need by the time it has reached a level of maturity when it would be prudent to reduce the scheme’s dependence on the employer. This should enable the scheme to be managed thereafter with a high degree of resilience to investment risks. Investment and funding strategies in the interim period are then aligned to the LTFT under journey plans where the TPs are the means to becoming fully funded up to the LTFT. Investment volatility and other short-term considerations often lead to the scheme's funding position at any given date to be above or below the path set. Strategies for managing such departures are also usually agreed within the journey plans. This is consistent with our IRM guidance.

In the current context, schemes with such long-term plans already in place should be able to continue to focus on their LTFT with suitable short-term modifications, and we encourage that. We encourage other schemes to follow similar practice and set a LTFT consistent with how the trustees and employers expect to deliver the scheme’s benefits, and then be prepared to evidence that their shorter-term investment and funding strategies are aligned with it. The government’s policy intent, as set out in the Pension Schemes Bill, is to introduce a legal requirement for schemes to have a specific long-term strategy. Readiness to comply with any such change is another reason why trustees should consider taking steps to incorporate this approach into their thinking, and agree it with the employer, if they do not do so already.

Covenant assessments

Assessing the covenant is about understanding the extent to which the employer can support the scheme, now and in the future, including the risks to this support being available when it is needed. The focus should be on the ability of the employer to make cash contributions to the scheme to achieve and maintain full funding over an appropriate period, including addressing downside risks. When assessing covenant strength, it may be appropriate for trustees and employers to undertake some stress testing or scenario planning which reflects possible future economic environments. Trustees should then consider how affordability may be affected under each scenario.

COVID-19 has resulted in considerable uncertainty over some employers' covenant strength and their affordability to address deficits in schemes. However, the impact will be varied across the landscape and we anticipate some businesses will recover more quickly than others.

For some businesses, the uncertainty over the employer covenant may be heightened further by the manner of the UK’s departure from the EU. In such cases, we also expect trustees to review the employer covenant to understand the potential impact of the different outcomes of the trade agreement negotiations, including the possibility of leaving the current trading agreement in December 2020 on World Trade Organisation terms.

Trustees should consider obtaining independent specialist advice to support covenant assessment. This is particularly important where the covenant is complex, deteriorating, or where the scheme has a high degree of reliance on the covenant, for example because it has a large deficit. Employers experiencing corporate distress or acute, near-term affordability restrictions present more challenges than normal. Assessment of distressed covenant and employer affordability, including any stress testing of this, often requires specialist knowledge to assess.

Trustees should only undertake their own covenant assessment where they have sufficient expertise. Where trustees undertake their own covenant assessment, they should fully document their reasons for not taking professional advice, as well as their own assessment and conclusions reached. Objectivity is also important. Trustees who also have roles within an employer may find it difficult to exercise sufficient objectivity when assessing the employer's ability to support the scheme. We expect trustees to have a full audit trail of their considerations and decisions, and we may ask them to share their detailed documentation with us. For more information see the conflicts of interest module of our code of practice.

Covenant monitoring and contingency plans

The strength of the employer covenant can change materially over a short period of time, even in the absence of profound events such as those we have seen over the last few months. In normal circumstances we expect trustees to closely monitor covenant strength and affordability, alongside the key investment and funding risks. In current conditions, we expect the frequency and intensity of monitoring to be significantly increased until covenant visibility and strength is restored. Trustees should identify the key aspects of the covenant to track and decide when action is required based on appropriate triggers or thresholds, informed by the level of change that could have a material impact on the covenant and therefore the funding or investment strategy.

Where the monitoring identifies adverse changes in the covenant, trustees should have contingency plans in place so they can react appropriately. Ideally, contingency plans should be drawn up in conjunction with the employer, with agreed trigger points that will result in specified actions taking place. For example, additional cash contributions will be paid if the scheme’s funding level deteriorates more than a specified level. It is not necessary for contingency plans to cover all eventualities or establish enforceable actions in every case. However, trustees should discuss key risks with the employer and what potential options for action there might be so that both parties are ready to respond as soon as a trigger is breached. Trustees should be able to demonstrate that these interactions with the employer have taken place and we may ask trustees to share relevant documentation with us.

Covenant leakage

Ongoing employer support is vital to trustees achieving their objectives, and trustees should be supportive of employers under financial pressures, in line with their duties to savers. However, they should be vigilant of employer covenant leakage, which reduces the ability of the employer to support the scheme. This could take many forms; the most obvious being dividends paid to shareholders. Other elements of an employer’s relationship with its group and shareholders, which could also result in covenant leakage and reduce the ability of the employer to support the scheme, include:

  • cash pooling and inter-company lending arrangements
  • group trading arrangements
  • management fees, royalties and similar charges
  • transfers of business or assets at undervalue
  • excessive executive remuneration

For healthy employers with short recovery plans, such arrangements are unlikely to be a problem. However, where the employer is seeking a long recovery plan because of limited affordability, trustees should ensure the employer’s affordability is not constrained by covenant leakage to the wider group and should seek appropriate agreements to prevent this.

Cash pooling and inter-company lending are common in corporate groups but can sometimes have a detrimental impact on an employer’s ability to support its scheme. Where cash pooling and inter-company lending occurs, we expect trustees to understand the intention behind the arrangements and the expectation and ability of the employer to retrieve funds. In the event amounts are not recoverable or readily available to meet scheme funding requirements, we expect trustees to account for that in their assessment of covenant strength and in scheme funding and investment decisions. Analysis of affordability should be before payment of amounts as intercompany loans or under cash pooling arrangements.

Other forms of covenant leakage such as group trading arrangements and charges and fees are of concern if the transactions are not on third party commercial terms. These are complex areas and can be challenging for trustees to understand without taking professional advice. However, it is important that trustees are aware of the impact that such trading arrangements, charges and fees have on the employer and consider all forms of covenant leakage when assessing fair treatment.

Where trustees consider covenant leakage is not justified, we expect them to seek suitable protections to compensate their scheme for the resulting deterioration in covenant, particularly where there are weaker covenants and longer recovery plans. This includes, for example, security over employer assets, or ‘upside sharing mechanisms’ so that, in the event of employer performance improving in future, the scheme can receive increased contributions.

Managing risks

We continue to expect trustees to focus on the integrated management of three broad areas of risk: the ability of the employer to support the scheme, the investment risks, and the scheme's funding plans. They should work with their advisers in all these areas to develop an IRM framework and associated governance which focuses on providing trustees with pragmatic and useful information for their decision-making.

Last year we introduced the following tables to set out our expectations, recognising that some broad segmentation according to the key drivers – funding strength, covenant and scheme maturity – would better enable trustees to match individual scheme circumstances with our guidance. Each table identifies the key risks we expect trustees to focus on, and the plans we expect them to develop, depending on their scheme and employer characteristics. Our guidance on the key long-term risks remains relevant for T15 valuations and is repeated below. We remind trustees that these tables are not intended to be exhaustive for each category, nor are they a substitute for reading this statement.

Since the majority of schemes are now closed to new members, we expect scheme maturity issues to assume greater significance for setting funding and investment strategies in the future. Scheme maturity can be measured in different ways and in each there is a spectrum between mature and immature. In our first consultation on the new funding code we ask about the most appropriate definition of scheme maturity for future use. In the meantime, this should not stop schemes from using whichever definition is convenient for them in order to decide where in the maturity spectrum their scheme fits. In the following tables we refer to scheme maturity in relative terms, but we expect scheme actuaries to advise trustees on the broad position of their scheme within this spectrum now, and how it may change in the future.

In the context of scheme funding, the important consideration is the interaction between:

(a) the level of assets, the degree of underfunding and the amount of benefits paid out, and

(b) the scheme’s ability to close the funding gap from investments and new contributions in a reasonable timeframe.

Accordingly, and particularly in those schemes with high levels of transfer activity, we expect advisers to alert trustees to the risks to funding and investment from increasing scheme maturity. As schemes approach high levels of maturity, trustees should ensure the employer is funding to a level where these risks are appropriately managed.

In the current context, we suggest that trustees should first decide how, if at all, their covenant has changed because of COVID-19, how it could be impacted by Brexit, and how good their funding position is relative to their long-term funding target given the period over which they are aiming to achieve it. This should enable them to find the table closest to their situation, our expectations of the risks they need to focus on, and the actions we expect. They should then set about preparing their recovery plans to balance visible affordability with contributions linked to well-defined triggers, contingency plans and other protections for member security, as outlined earlier in this guidance.

Tables on key risks trustees and employers should focus on and actions to take

Group A1
  • Strong or tending to strong covenant.
  • Scheme’s funding position is considered to be strong, TPs are strong and recovery plan is shorter than average (less than seven years).
  • Scheme is relatively immature.
Key risks
  • Employer exposed to market risk if scheme is not cash flow matched/hedged.
  • Covenant weakens at the same time as investments underperform.
  • Lack of long term covenant visibility.
  • TPs may not be aligned to the scheme’s LTFT.
What we expect from trustees and employers
  • Where there is a high level of covenant leakage, consider proportionately increased deficit repair contributions (DRCs) and shorter recovery plans.
  • Proportionate covenant monitoring.
  • Clear IRM strategy, with realistic contingency planning for key downside risks.
  • Set a long-term asset allocation consistent with the scheme’s LTFT.
  • Establish a journey plan to move towards the long-term asset allocation.
  • Quantify the impact on funding of adverse investment performance.
  • Test and evidence the ability of the covenant to support downside investment risk (supportable investment risk) by means of additional cash and non-cash funding, without extending the length of the recovery plan.
  • Agree your ultimate goal for the scheme and set a consistent LTFT.
  • Establish a plan for progressing from your current TPs to your LTFT within a realistic timescale.
  • Ensure TPs can be evidenced to be consistent with the journey plan to reach the LTFT.
  • If concerned about risk of trapped surplus, consider using escrow, asset-backed contributions (ABCs), and contingency planning.


Group A2
  • Same as group A1, but a relatively mature scheme.
Key risks
  • Same as A1, but with increased risk to employer from greater sensitivity to investment volatility and shorter timescales
    for correction.
What we expect from trustees and employers
  • Same as A1, with more focus on the resilience of the employer to withstand downside risks over a shorter time horizon.
  • Same as A1, but investment and funding plans to be structured to recognise the shorter time horizon, as well as the interplay between volatility in asset prices, investment returns and benefit outflows.
  • Consider your forward looking liquidity requirements in the light of expected transfer value activity.
  • Same as A1, and for schemes in surplus or close to surplus on the TP basis, test adequacy of TPs against assets needed to satisfy your LTFT.
  • Extending recovery plan end dates to make good any negative investment returns is unlikely to be acceptable, given the strength of the employer.


Group B1
  • Strong or tending to strong covenant.
  • Scheme’s TPs are weak and/or recovery plans are long (more than seven years).
  • Scheme is relatively immature.
Key risks
  • Same as A1, but with a focus on reducing scheme risk by strengthening TPs and recovery plans in the knowledge that the employer has the ability to provide a better overall funding agreement.
What we expect from trustees and employers
  • Proportionate covenant monitoring.
  • Where there is a high level of covenant leakage, proportionately increased DRCs and/or shorter recovery plans should be the norm.
  • In addition to enhancements to the recovery plan, strengthen short-term security through other means such as contingent assets and guarantees where available.
  • Same as A1, but with a focus on trustees to understand, quantify and justify the reliance on investment returns versus DRCs to repair a worse than anticipated deficit.
  • Same as A1. Strengthen TPs, increase DRCs and reduce recovery plan lengths.
  • Extending recovery plan end dates to make good any negative investment returns is unlikely to be acceptable, given the strength of the employer.


Group B2
  • Same as B1, but a relatively mature scheme.
Key risks
  • Same as B1, but with increased risk to employer from greater sensitivity to investment volatility, and shorter timescales
    for correction.
What we expect from trustees and employers
  • Same as B1, priority being to ensure the scheme is receiving sufficient cash contributions to meet its needs and is being treated fairly, plus a greater imperative to bolster security through contingent assets and contingency plans.
  • Same as A2, priority being to protect the scheme and employer from further downside while improving funding position by further cash and/or contingent assets.
  • Same as B1, with a stronger focus on improving TPs and recovery plans to align with the scheme’s LTFT.


Group C1
  • Weaker employer with limited affordability.
  • Scheme funding on track to meet LTFT, TPs are strong and contributions are reducing deficits at a slower but affordable pace.
  • Scheme is relatively immature.
Key risks
  • Same as A1 but a weaker covenant, which may be more susceptible to adverse future events.
  • Risk of the employer being unable to pay increased contributions if a downside investment event occurs, or in the event of sustained adverse investment experience.
What we expect from trustees and employers
  • Maximise DRCs without risking sustainable growth plans of the employer.
  • Ensure fair treatment of scheme over all sources of covenant leakage.
  • Consider non-cash funding options, eg ABCs, guarantees to strengthen security.
  • Proportionate covenant monitoring, with documented evidence of whether trustees consider independent covenant advice is necessary.
  • Where employer is part of a stronger group, seek wider group support through cash and non-cash support.

Same as A1, plus the following:

  • Review the extent to which investment risks are expected to be rewarded, and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to asset allocation.
  • Focus on diversification to reduce downside investment risk.
  • Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding based triggers/flags to monitor).
  • Where there is no (or inadequate) group support, consider reducing the current level of investment risk and running it for longer to slowly reduce the deficit over time.
  • Monitor transfer value activity and consider liquidity issues for the scheme if accompanied by a fall in market value of investments.
  • Same as A1, but recognising that the employer may have less resilience to cope with volatile contributions – stress and scenario testing will help you to understand exposures.


Group C2
  • Same as C1, but a relatively mature scheme.
Key risks
  • Same as C1, but with increased risk to employer from greater sensitivity to investment volatility, and shorter timescales
    for correction.
What we expect from trustees and employers
  • Same as C1, but with the additional constraint of a shorter time horizon.

Same as A2, plus the following:

  • Review the extent to which investment risks are expected to be rewarded and reduce where appropriate through suitable hedging/risk mitigation strategies and/or changes to asset allocation.
  • Focus on diversification to reduce downside investment risk.
  • Use funding level improvements to reduce the level of risk that is not supported by the covenant (set funding based triggers/ flags to monitor).
  • Ensure asset allocation provides sufficient income and liquidity to cope with expected and unexpected benefit cash flows.
  • Consider the volatility of the assets used to provide liquidity to avoid significant selling of assets at lower than expected prices.
  • If expecting high transfer value activity, take action now to protect the scheme against liquidity issues in the event of a market downturn.
  • Same as C1, but with the additional constraint of a shorter time horizon. Therefore, the LTFT and consistency with TPs is ever more important.


Group D1
  • Weaker employer with limited affordability.
  • Scheme’s TPs are weak and/or recovery plans are long (more than seven years).
  • Scheme is relatively immature.
Key risks
  • Same as C1, but more urgent need to improve funding and reduce member risk.
What we expect from trustees and employers
  • Same as C1, with a greater focus on securing wider group support where available.
  • Prioritise the scheme over all forms of covenant leakage.
  • Trustees should give serious consideration to obtaining independent covenant advice to assist them in maximising the support available for the scheme. If trustees decide not to do so, they should be prepared to justify why such an approach is appropriate.
  • If adequate formal group support has been conferred, treat as Group B1, otherwise treat as Group E1.
  • If adequate formal group support treat as Group B1, otherwise treat as Group E1.


Group D2
  • Same as D1, but a relatively mature scheme.
Key risks
  • Same as D1, plus increased risk of sudden or sustained adverse investment performance.
What we expect from trustees and employers
  • Same as D1, with a focus on maximising support for the scheme and prioritising scheme liabilities over all forms of covenant leakage.
  • Same as D1, with a focus on minimising unsupported risks.
  • Same as D1, with a focus on improving scheme funding.


Group E1
  • Weak employer unable to provide support.
  • Stressed scheme with limited or no ability to use flexibilities in the funding regime.
  • Scheme is relatively immature.
Key risks
  • Crystallisation of unsupported investment risk and/or employer affordability weakening further.
What we expect from trustees and employers
  • Where trustees consider that further support is possible (from the employer or wider group), independent covenant advice can support the trustees in negotiations to improve the scheme’s position.
  • Focus on mitigations against further covenant weakening, including cessation of dividend payments, and maximisation of non-cash support (be prepared to show the evidence).
  • Proportionate covenant monitoring using independent experts able to advise on areas where mitigation could be sought, and appropriate mechanisms to detect early signs of further deterioration.
  • If there is a high risk of employer insolvency, trustees should fully explore their options and consider which ones might be deployed to best enhance member outcomes. PPF guidance on insolvency and restructuring should help.
  • Same as C1, if there is a reasonable likelihood of the employer continuing as a going concern.
  • Where there are concerns over the financial position of the employer, ensure there is an appropriate investment structure and sufficient liquidity to reduce investment risk quickly if the covenant deteriorates further.
  • Seek best possible funding outcome for members in the circumstances.
  • Consider the appointment of a professional trustee with experience of stressed schemes, especially in circumstances where the company is already distressed even without the pension scheme.
  • Be prepared to show evidence of appropriate measures, including review of any generous options and discretionary benefits, cessation of future accrual, consideration of winding up, managing your conflicts, awareness of future funding risks and ability to manage them.
  • Monitor transfer value activity, the assumptions and consider any reductions you believe are appropriate to protect all members.


Group E2
  • Same as E1, but a relatively mature scheme.
Key risks
  • Same as E1, but limited time for recovery.
What we expect from trustees and employers
  • Same as E1, but recognising that the time horizon is shorter.
  • Same as C2, if there is a reasonable likelihood of the employer continuing as a going concern.
  • Where there are concerns over the financial position of the employer, ensure there is an appropriate investment structure and sufficient liquidity to reduce investment risk quickly if the covenant deteriorates further.
  • Same as E1 but recognising that the time horizon is shorter.
  • Be prepared to evidence good reasons for not reducing transfer values for underfunding.

What you can expect from us

As announced in our guidance for trustees, employers and administrators published on 20 March 2020 we have suspended our regulatory initiatives, which were detailed in last year's Annual Funding Statement (PDF, 170KB, 22 pages). Regulatory initiatives involve us contacting many schemes about a particular risk and engaging with those who we think have not adequately addressed it.

The principles behind the regulatory initiatives remain important and we will keep under review as to when we restart this work.

We are continuing the regulation of schemes in relationship-managed supervision and continue to take a risk-based approach in our regulatory activity against a range of risk indicators. We will be focusing our engagement on understanding and supporting trustees in responding to the impact of COVID-19.

While we have adopted several easements due to the impact of COVID-19, we will be ensuring these are not abused.

Other interventions

We will risk assess valuation submissions we receive in a proportionate way. These risk assessments look at the overall risk profile of a scheme relative to the ability of the employer to support it. It is therefore imperative that trustees and employers are fully aware of our expectations in this statement and in our wider guidance. Trustees and employers should be fully prepared to justify and explain their approach with supporting evidence.

Our powers

Our suite of powers includes the scheme funding power to direct how a scheme’s TPs should be calculated and how (including over what period) its deficit should be funded. We can use this power when there has been a failure to agree or when the valuation assumptions or recovery plan do not appear good enough to meet the standards required by law. For more information see our DB funding code, governance sections in the investment guidance and covenant guidance.

Often, we are able to achieve appropriate outcomes following engagement with the trustees and employer where we see non-compliance without recourse to this power. However, we may commence investigations leading to their use where we take the view that trustees and/or employers have not acted in line with the expectations set here, and in our relevant policy statements, guidance and codes of practice.