Regulator publishes 2023 funding statement

Our viewpoint

News Alert 2023/04

At a glance

The Pensions Regulator has issued this year’s DB funding statement.  As in previous years it sets out the Regulator’s key messages for trustees and sponsors of schemes who are undertaking valuations at the current time or are undergoing significant changes that require a review of their funding and risk strategies.  Unlike previous years it addresses what for many schemes may be a transformed funding position.

Key actions for trustees and scheme sponsors

  • Given the significant changes for DB funding that have taken place over the past year, reassess where the scheme has reached on its funding journey and take a fresh look at future risks and opportunities
  • Through establishing which of the Regulator’s scheme types the scheme most closely resembles, assess whether the Regulator’s expectations for that scheme type affect the current approach being taken by the scheme in relation to covenant, investment and funding issues
  • If not already done so, set a long-term funding target and establish a journey plan for progressing to it, ensuring that investment and funding strategies in the interim period are aligned

The Detail

On 27 April 2023 the Pensions Regulator issued its annual funding statement, aimed at trustees and sponsors of DB pension schemes.  The statement is focussed on schemes with valuations with effective dates between 22 September 2022 and 21 September 2023 as well as schemes undergoing significant changes that require a review of their funding and risk strategies.  Reflecting the changed environment for many DB schemes, it also applies to schemes that may be receiving requests for reduced contributions, amendments to contingent asset arrangements, and proposals for other uses of surplus.

Once more, although the statement is inevitably influenced by how the new funding regime is intended to operate, the Regulator confirms that all valuations subject to this statement will be regulated “according to the requirements of the existing legislation and guidance currently in force at the date of the valuation”.

In the sections that follow we summarise the content of the Regulator’s statement and give our views on what this means for schemes and their sponsors.

General considerations for schemes undertaking a valuation

Before addressing some specifics in relation to funding, investment and covenant, the Regulator makes the point that significant changes have been seen over the last year, as a result of which funding positions for all but a minority of schemes should now be ahead of plan with a significant number exceeding buyout funding levels.  But whilst most trustees should be approaching valuations from a relatively healthy funding position, they should recognise the economic uncertainty that will continue to impact investments and employer covenant in different ways – further increases in interest rates, high rates of inflation and volatile commodity and energy prices being specifically mentioned.

For the minority of schemes where funding levels have fallen, there is a need to reset funding and investment strategies in order to reach long-term targets.  And for open schemes, while the trustees’ immediate objectives may be different to closed schemes, the Regulator says that the principles outlined later in the statement should still prove useful in considering what actions to take in response to market conditions and improved funding levels, albeit with a focus on technical provisions rather than long-term targets.

Our viewpoint

This introduction sets the scene for what is to follow – guidance that reflects new opportunities, and in some cases challenges, both of which may have been well off the radar a year or so ago, let alone at the previous triennial actuarial valuation.

Rethinking strategies: funding position

In this section the Regulator sets out guidance depending on the scheme’s funding position.

  • Where funding has reached buyout levels (which the Regulator believes to be the case for around 25% of DB schemes) the guidance is focussed on the scheme’s endgame, pointing out the necessary preparation should buyout be the preferred route. Where the preference is instead to run the scheme on, possibly using the surplus to fund DC contributions or pay expenses, the guidance notes issues to consider including mitigating some of the risks by using part of the surplus to create a specific risk buffer
  • Where funding is above technical provisions but below buyout, the guidance is about the need to focus on the long-term objective and a timescale for reaching it, and potentially accelerating that process. There is a further push to agree a long-term funding target as a matter of urgency if this has not already been done.  The guidance also suggests that such schemes consider the steps they can take now to align (even broadly) with the key principles of the draft funding code
  • Where schemes still have a technical provisions deficit, the focus should be on repairing that deficit as soon as the employer can reasonably afford, checking that the technical provisions are aligned with the long-term funding target, and that risk being taken is supported by the employer covenant

Our viewpoint

The Regulator’s funding statements usually mention buyout as a distant prospect.  In 2023 the Regulator sees value in exploring some practicalities in getting from the position of having the money for a buyout to being prepared to transact.  But buyout won’t be for everyone in this first group and, for those schemes, how otherwise to take risk off the table needs the trustees’ full attention.

Rethinking strategies: investment considerations

Here the Regulator highlights the rise in long-term global interest rates in 2022 with the resulting poor performance of bonds, particularly in the UK.  There is a warning that asset allocation may be very different to where it was expected to be and the Regulator flags the need to review investment strategy in the light of a changed funding position.  The likely opportunity to de-risk, for at least closed and mature schemes, is mentioned.  Separately, the operational challenge faced by LDI positions is covered with a pointer to the Regulator’s April 2023-issued trustee guidance (see News Alert 2023/03).  The potential challenge if illiquid assets are a greater proportion of scheme assets than originally envisaged is also mentioned with some factors set out for consideration.

Our viewpoint

This year’s guidance says significantly more about investment than previously, perhaps reflecting the Regulator’s greater focus in this area, such as through developing the investment side of its draft DB Funding Code.  We can expect more in future years as schemes become more mature and it is the investment strategy above all else that backs the benefit promise.

Rethinking strategies: covenant considerations

This section is essentially a reminder that until the scheme has reached its end-game, covenant remains important, especially where risk is being taken with the investment strategy.  As a result, trustees need to avoid complacency despite significantly improved funding positions for many schemes.

Warnings are sounded in relation to corporate borrowing costs, higher energy costs, potential reduction in demand and the effect of higher short-term inflation on input costs and operational expenses.  All of these could constrain the affordability of deficit repair contributions and the ability of the employer to support the scheme’s investment risk taking.

There is also a suggestion that for well-funded schemes where no recovery plan is needed, covenant assessment could focus more on its longevity, including the potential impact of ESG risks, and be less focussed on uses of free cashflow.

Our viewpoint

While schemes remain ‘on risk’ covenant will always be important, but, as the Regulator has suggested, which aspect to focus on depends on the issues facing the scheme.  Trustees should not drop their guard on covenant assessment, especially if they are intending to adopt a ‘bespoke’ approach to funding under the new regime.

Other considerations

Finally, there is some guidance in the following four areas:

  • Longevity – where the Regulator is now of the view (along with other commentators) that mortality rates from 2022 onwards may be more indicative of future mortality than previous Covid-influenced years, and if so, this may suggest lower future life expectancies than those set pre-pandemic. Trustees are cautioned to proceed with care if they wish to weaken existing assumptions, but interestingly there is no mention of a 2% liability reduction backstop as there was last year
  • Inflation – the Regulator’s views on the challenges presented by high inflation, set out in the 2022 statement, are reprised
  • Revising recovery plans and contingent assets – there is some useful guidance for where a reduction or cessation of deficit repair contributions is being considered as part of an actuarial valuation, or has been requested outside the valuation cycle, both in the context of the scheme having a funding position that is ahead of where it intended to be. And separately, where the employer wants to renegotiate the terms of a contingent asset agreement in the light of improved funding
  • Assessing refinancing risk – the topical issue of refinancing against the backdrop of interest rate increases and tightened risk appetites of lenders is covered. The Regulator asks that refinancing risk be incorporated into covenant analysis and information sharing agreements and monitoring.  Where such refinancing is expected to be well progressed prior to the completion of the valuation, the covenant analysis should not be finalised until the terms of the refinancing become clear.  Where refinancing will fall after the valuation date but still within the short term, trustees will need to consider how it could affect future covenant support

Our viewpoint

On the third point, against the setting of a general and significant improvement in funding there is a danger that trustees are too accepting of requests which diminish employer support, believing it to be needed less now.  But circumstances can change.

What to expect from the Regulator

The Regulator starts by mentioning the draft funding code, saying that it now expects it and the accompanying funding and investment regulations to come into force together in April 2024 (for valuation effective dates from, it seems, that date) and that until then the existing code and guidance remain in place.  There is also a promise to publish updated covenant guidance (and other related guidance) later in 2023.  This is to provide more detail on covenant visibility, reliability and longevity, how to treat guarantees for scheme funding purposes and more information regarding ESG risks and how these can be factored into the covenant.

As before, there is the usual reminder that trustees are the first line of defence for savers and their pension schemes, promising Regulator engagement with schemes if trustees have concerns over corporate distress.  There is also the same promise that each valuation submission the Regulator receives is risk-assessed in a proportionate way and that “Trustees and employers should be fully prepared to justify and explain their approach with supporting evidence”.

The Regulator concludes with a reminder of its powers under the current scheme funding law and that it may carry out investigations where it believes trustees and/or employers have not acted in line with its expectations set out in this annual funding statement, and in relevant policy statements, guidance and codes of practice.

Key risks and the Regulator’s expectations

At the end of the statement the Regulator once more provides a comprehensive set of tables in which it sets out its expectations across covenant, investment and funding, which differ according to the characteristics of the scheme.  There are five scheme types as follows, with each further sub-divided according to whether the scheme is relatively immature or relatively mature:




Strong or tending to strong

Funding level on track to meet long-term funding target or ahead, technical provisions are strong, and recovery plan is shorter than six years


Strong or tending to strong

Funding level behind plan, and/or technical provisions are weak, and/or recovery plan is longer than six years


Weaker employer with limited affordability

Funding level on track to meet long-term funding target or ahead, technical provisions are strong, and contributions are reducing deficits at an affordable pace


Weaker employer with limited affordability

Funding level behind plan, and/or technical provisions are weak, and/or recovery plan is longer than six years


Weak employer unable to provide support

Stressed scheme with limited or no ability to use flexibilities in the funding regime

The above funding descriptors differ slightly from those in 2022, with the exception that those for B and D scheme types has been changed from “Funding level strong” and “Funding level on track to meet LTFT” respectively in the 2022 statement to “Funding level behind plan”.

The Regulator’s assessment of the key risks facing each category has been reiterated in the tables with little change from that in earlier years, except that the shorter timeframe for aligning with the long-term funding target is now highlighted for the B and D type mature schemes.

The actions expected in 2022 under each of covenant, investment and funding have been carried forward to this year’s statement to which are added the following sprinkling of new expectations:

  • Scheme types A, B and C are asked to review their LDI strategy and assess it for operational resilience – the Regulator’s recent guidance being highlighted (see News Alert 2023/03)
  • Immature A and B scheme types are expected to understand longer term risks including ESG factors
  • Mature A scheme types that are close to surplus are expected to test the adequacy of their technical provisions against the assets needed to satisfy their long-term funding target
  • Immature D scheme types must focus on strengthening technical provisions, increasing deficit reduction contributions and reducing recovery plan lengths

Trustees are asked to find the scheme type closest to their circumstances, which should help them determine the direction and magnitude of change to their funding and investment strategies, the risks they need to focus on, and the actions expected.  They should then prepare their recovery plans to balance affordability with other reasonable uses of cashflow for the employer.

In conclusion

The Pensions Regulator has been issuing annual funding statements around this time of year for some time now.  They are a very useful means by which the Regulator can influence funding discussions at trustee boards up and down the country.  Arguably they have been more influential in delivering an integrated risk management approach than all the policy work associated with the seemingly elusive new funding regime.  This year’s statement is of particular value because it addresses the opportunities provided as a result of a generally significantly improved funding position for many schemes, whilst not minimising the challenges presented and the risks that lie ahead.

This News Alert does not constitute advice, nor should it be taken as an authoritative statement of the law. If you would like any assistance or further information on the issues raised, please contact the partner who normally advises you at LCP via telephone on +44 (0)20 7439 2266 or by email to

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