DB Pension Scheme Funding – Pensions Regulator 2025 Funding Statement

The Pensions Regulator (TPR) has published its 2025 funding statement. It is targeted at DB schemes undergoing valuations with effective dates between 22 September 2024 and 21 September 2025. However, it is relevant to all DB schemes as it includes key information about TPR’s new DB funding code of practice and its updated covenant guidance. This update covers some of the key points in the statement.

Undergoing a valuation under the new DB funding regime

The new DB funding regime requires the valuation process to be more integrated and trustees should ensure they engage early with their advisers and the employer, working collaboratively with them throughout the process.

TPR has received some common queries about the new regime which it has sought to address in two appendices to the statement. Appendix 1 provides clarification on aspects of TPR’s updated covenant guidance. Appendix 2 provides clarification on how trustees should approach assessing the level of supportable risk. (TPR no longer intends to publish a formal supportable risk formula.)

TPR has been asked whether schemes should include their intention to move to buy-out in their funding and investment strategy. TPR’s view is that trustees will need to decide if the commitment to achieve buy-out is clear and settled enough for it to be appropriate to include in the funding and investment strategy. There is no legal obligation for schemes to meet the long-term objective within a specific timeframe (however, there is a requirement to comply with the principle of reaching low dependency by the scheme’s relevant date).

General considerations

Most schemes’ funding positions remain positive, with TPR estimating that:

• 85% of schemes are in surplus on a technical provisions (TPs) basis.
• 76% of schemes are in surplus on a TPR-derived low dependency basis.
• 54% of schemes are in surplus on a buy-out basis.

Based on this, TPR expects most schemes to be moving their focus from deficit recovery to endgame planning and it intends to publish guidance on DB endgame options this summer.

Trustees should keep in mind the potential for heightened trade and geopolitical uncertainty, as well as other dynamics that may impact investment strategies and employer covenant such as artificial intelligence adoption and energy transition. They 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. Where factors could have a material impact on the employer covenant, trustees must ensure the level of risk the scheme is running remains appropriate. Robust and effective governance operational processes should be in place.

Until further detail is available on the government’s plans to change the rules around release of surplus, trustees should follow existing legislation and their scheme rules. It is good practice for trustees to have a policy on release of surplus.

Funding strategies

In line with previous statements, TPR has grouped schemes into three categories for the purposes of the scheme’s funding strategy:

• Group 1: funding level is at or above low dependency – Focus should be on endgame planning.
• 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 which should be recovered as quickly as the employer can reasonably afford.

How we can help

In addition to advising generally on the 2025 funding statement, Mayer Brown can advise trustees and employers on:

• The changes to the statutory funding regime that came into force in 2024 and TPR’s new DB funding code.
• Scheme funding packages, including contribution ratchet mechanisms and alternative funding solutions such as contingent assets, asset-backed contribution arrangements and escrow arrangements.
• Legal aspects of employer covenant assessment and monitoring processes, including information-sharing protocols.
• Investment governance processes.
• Scheme buy-out, including preparations for buy-out.
• Other endgame strategies, including transfer to a DB superfund.
• Putting in place a policy on release of surplus.