This statement 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 2024 and 21 September 2025, now known as Tranche 24/25 or T24/25 to reflect the calendar year (previously known as Tranche 20 or T20).
It’s also relevant to all DB schemes as it captures some key information regarding the new DB funding code of practice and updated covenant guidance.
Published: 29 April 2025
Key messages
- Most schemes continue to see positive funding levels, with our estimates as of 31 December 2024 showing around:
- 85% of schemes in surplus on a Technical Provisions (TPs) basis
- 76% of schemes in surplus on a The Pensions Regulator (TPR) derived low dependency basis
- 54% of schemes in surplus on a buyout basis
- With this continued strong funding position, we expect most schemes to be shifting their focus from deficit recovery to endgame planning.
- Despite healthy funding positions, trustees should keep in mind the potential for heightened trade and geopolitical uncertainty and understand any risks to the scheme’s investment strategy and employer covenant.
- We estimate that around 80% of schemes should be able to meet Fast Track. Fast Track enables TPR to reduce regulatory burden, as schemes can provide less information as part of the statement of strategy.
- We’ve provided further information to support trustees and employers undertaking and submitting their valuation under the new DB funding regime. We will be risk-based and outcome focused when deciding which schemes to interact with.
Introduction
Our analysis indicates that on a TPs basis, the aggregate funding level as of 31 December 2024 was 123%, with less than 15% of schemes expected to have a deficit. On a buyout basis, around 54% of schemes were in surplus. However, the position for individual schemes will vary greatly compared with aggregate estimates.
Over the period 31 December 2024 to 31 March 2025, we expect overall funding to be broadly similar to that as the end of December 2024, albeit with slightly lower liabilities and asset values. We recognise that recent trade and geopolitical tensions have increased uncertainty including around interest rates, inflation and global economic growth. Volatility is expected to continue, and this may influence scheme funding.
For more detail, see the accompanying analysis that supports this statement.
We will regulate all T24/25 valuations according to the requirements of the legislation and guidance in force at the effective date of the valuation. This is now captured under the amended Part 3 of the Pensions Act 2004, The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024 and the DB funding code.
We will continue to be proportionate in our risk assessment when regulating T24/25 valuations. For the first time, we have defined what we consider to be tolerable risk under Fast Track. While Fast Track may not be the right approach for all schemes, if a scheme does adopt our Fast Track parameters, they can provide less evidence and explanation in the statement of strategy. It’s also less likely we will engage with the scheme. We expect around 80% of schemes to be able to achieve Fast Track. For some of these schemes this might require a change in their existing funding approach, but this could be done at minimal or no cost to the employer. For T24/25, we do not intend to make any changes to the Fast Track parameters published in November 2024. We will continue to keep these under review for the future.
Schemes that follow the Bespoke route, which allows more flexibility for scheme specific approaches, will need to provide more evidence in the statement of strategy. This is to show that the level of risk being run is supportable and the long-term strategy is appropriate. We will consider this evidence, relative to the expectations set out in the legislation and DB funding code and, where appropriate, may engage further to understand the approach. If we remain concerned following our engagement, we will consider the use of our powers. We will be risk-based and outcome focused when deciding which schemes to interact with.
We will use the data received from schemes, including from the statement of strategy, to identify emerging risks across individual schemes and the pensions landscape. This will enable us to respond to these risks in a more targeted way. We will also use the data to support publications and our response to future legislative changes.
Undergoing a valuation under the new DB funding regime
This will be the first time schemes complete their valuations under the new DB funding regime. During our engagement with the industry, we received some common queries. We have addressed these within the appendices in this statement and in the defined benefit funding code webinar. The new DB funding regime requires the valuation process to be more integrated. Trustees must ensure they work collaboratively with their different advisers throughout the process. Given the new elements introduced, it will be important for trustees to engage early with advisers and employers.
We published our new covenant guidance in December 2024, which has been positively received by the industry. In response to feedback, we've provided additional clarification in appendix 1 of this statement.
One other area that has received particular interest is supportable risk. Given the principle-based approach taken in the DB funding code to assess supportable risk, we no longer intend to publish a formal supportable risk formula. This recognises the need for schemes to approach an assessment of supportable risk, based on the specific merits of the scheme and the employer. We've provided additional clarification in appendix 2 on how trustees should approach this assessment, addressing specific concerns or questions.
Another area that has been queried is whether schemes should include their intentions to buyout in the funding and investment strategy. The statement of strategy allows flexibility when describing the long-term objective for schemes. This should allow trustees to accurately describe their specific plans. For example, aiming to reach buyout at an unspecified point after the relevant date while reaching low dependency by the relevant date on the way. Trustees will need to decide if the commitment to achieve buyout is clear and settled enough for it to be appropriate to include in the funding and investment strategy. There is no legal obligation to meet the long-term objective within a specific timeframe, although there is a requirement to comply with the principle of reaching low dependency by the scheme’s relevant date.
We have also been asked whether there will be any transitional easements as we move into the new regime. We have thoroughly consulted throughout the drafting of the DB funding code and expect schemes to have planned accordingly. Schemes will need to consider employer cash flows and contingent asset support when assessing supportable risk and reasonable affordability when setting an appropriate recovery plan. If they are supported by an employer with ample affordability, we expect the funding deficit to be resolved quickly, with any additional employer cash flows going to support risk taking within the scheme's journey plan, where required. If there are issues with affordability, schemes will need to consider the 'inability to support risk section' of the DB funding code under Investment and risk management considerations and determine whether it’s appropriate for the scheme to take unsupported investment risk or explore other options.
We expect to publish our statement of strategy consultation response alongside the launch of the new 'Submit a scheme valuation' digital service in Spring 2025. Trustees will be able to use the new digital service to complete their statement of strategy and submit it alongside their other valuation documents. While we do not expect trustees to delay the completion of their valuation, we will not expect submission until the new digital service is live. During this period, we will not treat a delay to the submission as a breach.
General considerations
DB schemes have seen significant changes to their funding levels over the last three years with 76% already fully funded on a TPR derived low dependency basis, see our analysis for more information. Therefore, focus for most schemes needs to shift from deficit repair to end game planning. We will be publishing some DB end game guidance in early Summer that trustees should find useful. Trustees should seek advice on what the most appropriate option is for their scheme, based on their scheme's individual circumstances.
The employer covenant supporting schemes also remains an integral element to consider when assessing the level of supportable risk within a scheme's journey plan. This is particularly important where schemes are poorly funded, large in comparison to the size of the employer, or taking significant levels of risk.
While most trustees are likely to be approaching T24/25 valuations from a relatively healthy funding position, they should recognise the macroeconomic uncertainty that continues to impact scheme investments and the employer covenant in different ways. This includes heightened trade and geopolitical uncertainty which could introduce further volatility to an already uncertain future path for interest and inflation rates, as well as having implications for global stock markets and UK global economic growth. Trustees should ensure their short-term liquidity and cash flow requirements can be met whilst their longer-term investment strategy continues to reflect the changing economic landscape. Artificial intelligence adoption and energy transition are two other dynamics that may impact investment and employer covenant.
Where these factors could have a material impact on an employer's cash flows and prospects, trustees must consider whether the current level of risk the scheme is running remains appropriate. Where risk-taking is no longer supportable, trustees should be adjusting their journey plan to low dependency accordingly.
Taking this into account, trustees should put in place the right governance, controls and understand the risks being run in the scheme's investment strategy. You must ensure that you have robust and effective operational processes in place to enhance the resilience of your scheme to market shocks and reduce the risks to your scheme to acceptable levels.
For example, in April 2023 we published guidance on using leveraged liability-driven investment (LDI) and we encourage you to remind yourself of this as we continue to see the potential for volatility in the gilt market. We encourage trustees to carry out periodic stress tests to evaluate the robustness of their LDI strategy and the trustees' ability to replenish interest rate buffers within five days. We also ask trustees to be more aware of the concentration risks associated with the assets earmarked for sale during stress events. You may consider whether a diversified pool of collateral assets and a more flexible approach may be more prudent.
As discussed in last year's Annual Funding Statement, climate change and wider sustainability issues (including related transition and physical risks) continue to be a concern for trustees and companies. Trustees should work with the employer and their advisers to understand the potential implications. Trustees should review our Climate-related governance and reporting guidance.
We know there is increased interest on scheme funding surplus and the potential release of those surpluses. We expect more information to be shared around the government's plans to legislate in the upcoming Pensions Bill. Until further detail is known, when considering options in respect of scheme surpluses, trustees should follow existing legislation and the provisions contained in their scheme's rules. It is good practice for trustees to have in place a policy for the release of surplus in the context of their individual scheme, and they may wish to start thinking about how they would approach any requests to release surpluses from the employer.
Funding strategies
In previous statements, we grouped schemes into three broad categories based on their funding level. We have followed a similar approach this year, adapting for the new DB funding code.
Group 1: funding level is at or above low dependency
Focus should be on end game planning. See our DB end game guidance when published for more information around the different options available. If schemes decide to run on, they will need to weigh the benefits against the ongoing risks and put in place suitable monitoring and management strategies. They will also need to continue monitoring the employer covenant to ensure it continues to provide the necessary support for the risks.
Group 2: funding level is above TPs but below the low dependency funding target
Focus should be on ensuring the scheme continues on the path to achieving the low dependency objective by the relevant date.
Group 3: funding level is below TPs
Focus should be on addressing the deficit. TPs should be consistent with the scheme’s journey plan to reach low dependency by its relevant date. The level of risk should be dependent on employer covenant support and, subject to that, the maturity of the scheme. Any deficit should be recovered as quickly as the employer can reasonably afford to.
Appendix 1: clarifications on assessing and monitoring the employer covenant
Before starting your employer covenant assessment, trustees should work with their advisers to understand the current level of reliance on the employer covenant to support the scheme's funding needs, as well as the level of funding and investment risk within the scheme's existing journey plan.
A lighter touch approach to assessing the employer covenant, particularly the reliability period, may be more appropriate from the outset where a scheme has lower reliance on the employer covenant. For example, where a scheme is well funded and running limited levels of funding and investment risk, and not planning to increase their risk appetite going forward.
A good starting point in this situation would be to consider what reliability period the scheme requires the employer to have to support its existing funding and investment strategy.
Where the reliability period has no bearing on the level of risk being run (for example, where the scheme is fully funded on low dependency basis, with any surplus above this being sufficient to cover any risk within the journey plan), trustees should focus on identifying any material covenant risks that could lead to the scheme not paying members' benefits in full. The reliability period assessment will be less relevant in this scenario.
When relying on a shorter reliability period than what is likely to be the employer's actual reliability period, trustees may wish to focus their assessment on justifying that the employer's reliability period is "at least x" rather than looking at the period beyond this point. Alternatively, trustees may wish to focus their assessment on evidencing why the employer has a reliability period that sits within TPR expectations of three to six years.
When considering the scope of any covenant assessment, trustees should also look at what aspects of the covenant they are placing the most reliance on. For example, if a scheme intends to run risk based on a contingent asset, rather than relying on the employer to make future contributions, should the risk crystalise, then greater focus should be placed on evidencing the value coming from this contingent asset. A lighter touch assessment of cash flows and of the reliability period is also likely to be appropriate, provided this is not needed to assess the employer's reasonable affordability.
Trustees should also be mindful that the covenant guidance has been developed to cover a range of scheme and business characteristics. Not all of these will be relevant to their scheme. This is particularly true when it comes to the Prospects section, where the eight factors outlined may not all be relevant to your employer.
An assessment of the reliability period should focus on employer-specific factors such as the employer's market outlook and future pipeline (among other things) that drive the level of certainty over cash flows in the future. It should not take account of how these cash flows will be used. For example, to fund future deficit repair contributions.
Considering the reliability period independently from the scheme's funding needs should prevent employers of well-funded schemes having longer reliability periods where this is not supported by the employers' business model.
Although no credit will be given to better funded schemes when assessing the reliability period, the funding needs of the scheme will feed into a trustee's assessment of maximum affordable contributions. This is because this metric is assessed after deducting future deficit repair contributions.
The funding needs of the scheme can also play an important role in determining what would be a proportionate assessment of an employer's reliability period (see the clarification on proportionality for more detail).
The reliability period should take into account the certainty of future cash flows regardless of their magnitude. Therefore, where employer cash flows are limited or negative, this does not automatically mean the reliability period is nil or should come to an end.
Provided the trustees are reasonably certain of these cash flows and are comfortable they will not impact the sustainability of the employer (for example, where the employer has a sufficiently robust balance sheet to fund limited or negative cash flows through reserves, and has a sustainable business plan), this alone should not dictate the reliability period.
For example, an employer may expect negative cash flow in the first and second year of their forecasts, as they are planning to invest heavily in capital expenditure over these years. However, they may expect this investment to lead to positive cash flows in years three and four. Following a review of the employer's business plan, the market it operates in, and considering the employer's balance sheet resilience, the trustees may conclude that they have reasonable certainty over cash flows over the four-year period and therefore, are comfortable relying on a four-year reliability period.
We also recognise that many not-for-profit employers will target limited cash generation, investing any income in charitable activities. This should not directly impact how trustees assess the employer's reliability period. Instead, the focus should remain on the extent to which they have reasonable certainty over these cash flows (whether negative, positive or breakeven) into the future.
Understanding the reasonableness of the employer cash flow forecasts is the first step in defining the reliability period. However, the reliability period should not necessarily be constrained to the forecast period.
Trustees should also consider the employer's short to medium term prospects and the extent to which these provide reasonable certainty of future cash flows beyond the forecast period. In the absence of a specific event or series of events (during or after the forecast period) that is likely to restrict the level of certainty over future cash flows, trustees (with the help of professional advisers, where needed) must use professional judgement to determine an appropriate cut off. For further details and examples of how this may work in practice, see the Reliability period and covenant longevity period section of the covenant guidance.
The starting point for both these cash measures is employer cash flows. For further detail on how to assess employer cash flows, see the Assessing cash flow section of the covenant guidance.
Maximum affordable contributions are different from available cash because they:
- exclude liquid assets – unless they are being used to fund deficit repair contributions
- should be after deficit repair contributions – as this cash is already committed to support the existing deficit and, therefore, will not be available to fund any further deterioration caused by a scheme-related stress event
- should be after making reasonable adjustments to employer cash flows to reflect how management is likely to respond in a scheme-related stress event
An example of what might be a reasonable adjustment to maximum affordable contributions would be deducting shareholder distributions if these are unlikely to be halted after a scheme-related stress event. Adjustments can work in both ways – to reduce maximum affordable contributions or to increase them. Using such levers to increase maximum affordable contributions are likely to be more prevalent where the employer is a charity. Adjustments will require professional judgement and should be based on discussions with management and previous experience.
Given the different methodologies used to calculate these two cash flow measures, maximum affordable contributions will often be lower than available cash, as it excludes liquid assets (which for some will be a material balance) and is after deficit repair contributions.
For further information on how to assess maximum affordable contributions and available cash, see the 'Determining the covenant inputs required to assess supportable risk' and 'Recovery plans' sections of the covenant guidance.
Where covenant longevity is finite, we expect trustees to plan to reach low dependence on the employer before the end of this period. Ideally, in this scenario, trustees should be thinking beyond low dependence to reaching their end game.
Conversely, where covenant longevity is constrained by an inability to forecast beyond a certain point in the future and is therefore expected to be rolled forward at the next valuation, a scheme's journey planning to low dependency can exceed this period. When assessing the level of supportable risk that a scheme can run beyond this point, trustees should take account of the factors set out under the Journey planning section of the DB funding code under Journey planning in the post-reliability period.
Regardless of whether covenant longevity drives journey planning decisions, an assessment of the employer's prospects and covenant longevity remains important to identify any material risks to the existing covenant deteriorating in the future. The outcome of this assessment should feed into the scheme's monitoring processes.
For open schemes, the trustees' assessment of covenant longevity (along with their assessment of the reliability period) will also feed into the actuarial assumptions around how long the scheme will remain open to future accrual and new members.
Low dependency is not no dependency. Covenant support will still be required until the scheme is transferred to another entity or wound-up. Therefore, even at a low dependency funding level, the scheme is exposed to employer and scheme related risks.
For this reason, trustees should continue to monitor their covenant even if their scheme is fully funded on a low dependency basis. However, they can take a proportionate approach and focus on the key risks that could lead to a deterioration in covenant.
This focus and the trustees' view on covenant longevity should help inform their decision on what may be an appropriate end game strategy. For example, where trustees have no material concerns with covenant longevity, this may support running on. In such cases, contingent asset support can continue to play an important role beyond low dependency to support the scheme against any downside funding, investment and covenant risks. However, where covenant longevity is expected to be restricted beyond a certain point, it may support trustees exploring other options.
Contingent assets can be used to support risk-taking in the journey plan and help schemes achieve full funding on a low dependency basis by the relevant date. However, trustees need to be mindful not to run risk off the back of a contingent asset that may not be able to provide the level of support needed at the time it is required. Should this happen, trustees may put themselves in a position where they can no longer reach low dependency by the relevant date, resulting in a breach in the funding and investment strategy regulations and DB funding code.
Where the scheme has a guarantee that is only triggered by an insolvency of the employer or missed deficit repair contributions (such as a PPF standard guarantee), any assessment of maximum affordable contributions should be based on the cashflows of the statutory employers only. If trustees run risk based on having such a guarantee and should this risk crystalise, this will lead to a longer recovery plan than if a look through to affordability was provided by the guarantor. This will increase the likelihood that the scheme will not reach its low dependency funding target by the relevant date.
Given the risk associated with taking additional risk based on having a non-look through guarantee, trustees should only place a value on such a guarantee in their supportable risk assessment when they can be reasonably certain of the level of support it can provide when required. The Contingent assets section of guidance, under 'Valuing guarantees' provides further detail on how trustees can assign a value to non-look through guarantees. However, we acknowledge that for some schemes, this will be challenging.
Even so, this should not detract from the other benefits non-look through guarantees can provide. For example, where the employer's reliability period has been assessed using a range, a non-look through guarantee could be used to support relying on the higher end of this range when assessing reasonable affordability and supportable risk. Trustees may justify this on the basis that the guarantee provides an incentive to the guarantor (or wider group) to ensure that the employer doesn't default on its commitments, triggering the guarantee. We would not expect this form of guarantee to extend the reliability period beyond what is assessed for the employer on a standalone basis.
Where trustees are using an existing non-look through guarantee to take risk within the scheme's journey planning that is no longer supportable under the new funding regime, we expect trustees to consider enhancing the terms of the guarantee, or if available, seek additional contingent asset support. If this is not possible, the trustees should look to reduce the level of risk accordingly. We do not expect trustees to seek an enhancement to existing contingent asset support where this is not required to support the level of risk within the scheme's journey plan.
We have tried to provide specific guidance for charities and other alternative business models in the covenant guidance. However, we appreciate that in certain circumstances the approach suggested will not always be applicable.
Where this is the case, trustees should be able to justify what approach they have taken and evidence why it still complies with the funding and investment strategy regulations and principles set out in the DB funding code.
We understand that trustees may see benefit in having a covenant rating for their scheme. For example, to compare to historical conclusions, to help with transaction and Pension Schemes Act 2021 analysis – and may continue to use these going forward.
However, for valuation purposes, TPR will be moving away from covenant ratings. We will require trustees to consider the key elements that make up the scheme’s covenant and whether this supports the level of funding and investment risk being run in the scheme’s journey plan to low dependency funding.
Where trustees can demonstrate they meet the Fast Track parameters, they can provide less information to TPR as part of the statement of strategy and we are less likely to engage with their scheme.
However, Fast Track is not risk free and will not be appropriate for all schemes. Trustees, irrespective of their valuation submission route, should carry out a proportionate covenant assessment to satisfy themselves that they are following the principles set out in legislation and in the DB funding code – including the supportable risk principle.
Appendix 2: clarifications on supportable risk
As set out under the Journey planning section of the DB funding code under 'Principles for assessing supportable risk over the reliability period', at a minimum we expect trustees to reflect a downside event with a probability of one-in-six, applied over the reliability period.
Therefore, for example, if the reliability period is six years we expect the downside event to reflect what might happen over six years with a probability of at least one-in-six. It is not an assessment of a one-year downside event (unless the reliability period is one year).
We expect trustees to use their existing approach for modelling risk where possible in this assessment. However, we do not wish to place undue burden on schemes. We expect trustees to be proportionate and pragmatic in deciding on a reasonable modelling approach to adopt, reflecting their scheme specific circumstances.
For example, particularly for smaller schemes, a deterministic approach could be adopted for projection with an allowance for an appropriate downside event. That downside event, assessed over the whole of the reliability period, could be determined using a simple approximate adjustment to a one-year assessment.
The supportable risk test focuses on whether the current covenant is sufficient to support a scheme-related stress event. We do not consider it proportionate for trustees to 'stress' employer forecasts as part of this assessment. Particularly because trustees are expected to consider the sensitivity of these cash flows when determining appropriate employer cash flows, ahead of calculating maximum affordable contributions.
The DB funding code sets out our expectations, that, when assessing supportable risk, schemes should use the reliability period when determining maximum affordable contributions and contingent asset support available, as well as the period over which the stress event should be calculated. We expect this approach to be applicable in most circumstances. However, we also expect trustees to consider their scheme specific circumstances in determining their funding and investment strategy and therefore, consider other regulatory requirements and DB funding code expectations when assessing supportable risk.
Where the period to relevant date is shorter than the reliability period, we expect trustees to be mindful of the requirement to be fully funded on a low dependency funding basis at the relevant date when considering the appropriate investment journey plan. This may reduce the maximum level of risk that the trustees consider appropriate.
Where an approach of using the shorter period up to the relevant date is at least as prudent as using the reliability period, this would be in line with our expectations.
In all circumstances, trustees should use a consistent period when considering maximum affordable contributions and the period over which the downside event is determined.
The purpose of the supportable risk assessment is to ensure trustees consider the employer covenant support available over the reliability period in the event of a scheme-related stress event. This is based on the information available at the time of performing the analysis. This assessment can inform discussions with management and help mitigate the risk of the scheme running unsupportable funding and investment risk.
We appreciate that a stress event could happen at any time across the reliability period. However, it would not be reasonable or proportionate for trustees to consider all eventualities. For a number of schemes, we expect the employer's reliability period to be rolled forward at each valuation (subject to a material change in the employer’s prospects). This provides comfort that any increased deficit due to a scheme-stress event is likely to be affordable over the same rolled period.
We are also reassured that trustees will be required to re-assess the appropriateness of their journey plan at least every three years as part of their scheme valuation. If the reliability period materially changes at that time, or should a scheme-related stress event arise ahead of the valuation and lead to a materially different outcome, the trustees can alter their journey plan accordingly.