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tPR’s Annual Funding Statement 2021


The Pensions Regulator (tPR) published its 2021 Annual Funding Statement on 26 May 2021. The statement is for trustees and sponsors of Defined Benefit (DB) pension schemes and is particularly aimed at schemes with actuarial valuations between 22 September 2020 and 21 September 2021 (‘Tranche 16’) as well as those reviewing their funding and risk strategies.

Some of the key points are summarised below:

DB funding code consultation

The Pension Schemes Act 2021 has now received Royal Assent and tPR has conducted the first of two consultations on the new DB funding code. This consultation focused on the underlying principles of the new code and tPR published its interim response in January 2021.

The second consultation will follow DWP’s consultation on regulations to provide further details on the requirements of the Pension Schemes Act 2021 and is expected to take place in late 2021. The new funding code is not expected to come into force until late 2022 at the earliest. All Tranche 16 valuations should continue to follow existing legislation and guidance.

Funding positions

tPR expects that actuarial valuations with an effective date on or around 31 December 2020 will show broadly unchanged funding positions when compared to three years previously. Schemes that have hedged interest rate and inflation risks are likely to show slightly improved funding compared to unhedged schemes.

The first quarter of 2021 saw equity markets rise and bonds market fall. tPR therefore expects the funding positions for those schemes with valuation dates on or around 31 March 2021 to be stronger than those with December 2020 valuation dates and also improved when compared to three years ago.

Scheme-specific considerations


The Retail Prices Index (RPI) will be aligned with the Consumer Prices Index including owner-occupier housing costs (CPIH) from 2030. Trustees should consider pre and post 2030 inflation assumptions and ensure that any adjustments to market-implied inflation measures are consistent with the inflation exposure within their investment strategy.


tPR acknowledges that the impact of COVID-19 on future mortality improvements remains hugely uncertain with some arguments suggesting future longevity improvements will fall significantly and others concluding the exact opposite. Trustees should be aware that any view taken on long term mortality now may not materialise in the future and they should therefore plan accordingly.

tPR also notes that the base assumptions underlying the latest CMI mortality projection model ignores data from 2020. Whilst trustees may decide to include an element of this data when setting their mortality assumption, tPR expect any material inclusion of the 2020 data to be justified.

Post valuation experience

Trustees and sponsors can take account of post valuation experience when agreeing a recovery plan, however tPR expects a valid justification for this rather than just selecting the date with the most favourable market conditions. Any allowance for post valuation experience must allow for both positive and negative impacts.

Taking into account employer affordability, tPR typically expects positive post valuation experience to be used to reduce recovery plan lengths rather than to reduce the level of deficit repair contributions (DRCs).

Liquidity of investments

With the majority of schemes now closed to new members and maturing, tPR encourages trustees to carefully consider and manage liquidity risks as well as other investment-related risks.

Covenant assessments

tPR again emphasises the importance of trustees obtaining independent covenant advice particular for those schemes with complex or deteriorating covenants or those where COVID-19 or Brexit has had a significant or unclear impact.

tPR reiterates that it expects trustees to be particularly vigilant of employer covenant leakage and encourages trustees to monitor covenant strength on a regular basis and put in place contingency plans to enable them to react appropriately to any changes.


tPR suggests that the impact of COVID-19 on scheme sponsors is likely to fall into one of three categories:

  • Limited impact
  • Material initial impact but strong recovery seen
  • Continued material impact

Trustees should consider which of the above categories are most relevant to the sponsor of their scheme and, particularly for those that fall into the third group, should not assume there will be a full recovery in covenant strength without good justification.

For those schemes in the first group, tPR expects a ‘business as usual’ approach meaning it would not generally expect DRCs to be reduced or recovery plans to be lengthened.

For those in the middle group, tPR accepts that there may be short-term affordability constraints. Trustees should carefully consider requests for lower contributions and tPR would expect higher contributions in subsequent years to limit the overall impact on the length of recovery periods. tPR also stresses that any reduction to pension scheme contributions would, in its view, be inconsistent with shareholder distributions (i.e. dividends).

tPR notes relatively few employers have requested the suspension or reduction of DRCs and reminds trustees that, in such circumstances, they should look to obtain suitable mitigations such as a suspension of dividends, equitable treatment to other creditors, contingent assets or parental company guarantees.

Managing risks

tPR continues to expect trustees to take an integrated approach to managing risks and encourages schemes to develop and maintain an Integrated Risk Management (IRM) framework. In particular, trustees are reminded to consider:

  • Climate change – this may impact funding assumptions, investment markets and the sponsor covenant
  • Long-term funding targets (LTFTs) – schemes with LTFTs already in pace should continue to focus on these with short-term modifications if required. Those without LTFTs are encouraged to set one and be prepared to demonstrate that their short-term funding and investment strategies align to it
  • Scheme maturity – it is important for trustees and their advisers to consider the interaction between the level of assets, funding and benefit payments and the scheme’s ability to recover any deficit from investment returns and contributions in a reasonable period
  • Governance – tPR’s consultation on a single code of practice incorporates a requirement for schemes to carry out an Own Risk Assessment (ORA). Trustees of Tranche 16 schemes should be aware that they will need to carry out an ORA during their next inter-valuation period.

To assist both trustees and employers to focus on the key risks affecting their schemes, tPR has repeated the tables that set out their expectations for schemes in a variety of different segmentations (based on funding level, maturity and covenant strength). These are consistent with last year and trustees are encouraged to review their schemes against the most appropriate groups and consider whether the COVID-19 pandemic, or any other factors, have changed the scheme segmentation from any previous assessments.

The 2021 Annual Funding Statement can be found here.

If you would like any further information in relation to the above, please get in touch with your usual Quantum Advisory contact or email us at

28 May 2021