TPR publishes annual funding statement
The Pensions Regulator (TPR) has published its latest annual funding statement. The statement is particularly targeted at schemes with valuation dates between September 22, 2024 and September 21, 2025, but includes important information for trustees and sponsoring employers of all occupational defined benefit (DB) schemes.
The new DB funding regime
This is the first statement since the introduction of the new DB funding regime. Appendices to the statement include clarifications in relation to the new regime in respect of:
- Assessing and monitoring the employer covenant, following December’s covenant guidance. This includes sections on: assessing the employer covenant and employers’ reliability periods; the difference between maximum affordable contributions and the employer’s available cash; considering covenant longevity in setting a journey plan; the role of the covenant once a scheme is fully funded on a low dependency basis; why a PPF guarantee is not considered to be a ‘look through’ guarantee (which limits the value that can be placed on it); how to approach an employer with an alternative business model; TPR’s view on moving away from covenant ratings; and assessing the employer covenant when considering the Fast Track route.
- Assessing supportable risk. This includes sections on modelling risk; not 'stressing' employer forecasts as part of the supportable risk test; assessing supportable risk where the period to relevant date is shorter than the reliability period; and the impact of an actual scheme-related stress event occurring during the reliability period.
TPR expects to publish a response to its statement of strategy consultation in spring 2025 (it published an interim response in September 2024), alongside the launch of the new 'Submit a scheme valuation' digital service. Trustees must use the new digital service to submit their statement of strategy and other valuation documents for valuations with effective dates on or after September 22, 2024. TPR does not expect trustees to delay the completion of their valuation until the service is available but will not expect submissions until the new digital service is live; any delay in submissions until then will not be treated as a breach.
Scheme surpluses
The statement reports that the majority of DB schemes are in surplus on a buyout basis (54%), low dependency basis (76%) and technical provisions basis (85%). Given these funding levels, TPR expects most schemes to shift their focus from deficit recovery to endgame planning. Guidance will be published on considering endgame options in ‘early summer’.
In relation to the government’s plans to change the rules on accessing surplus, TPR suggests that it is good practice for trustees to have in place a policy for the release of surplus, and they may wish to start thinking about how they would approach any requests to release surpluses from the employer.
Macro-economic issues
TPR flags that trustees should consider whether their current approach to e.g., cash-flow, long-term strategy, risk, governance and operations remains appropriate in light of macroeconomic uncertainty, AI adoption and energy transition. TPR encourages schemes to revisit its guidance on using leveraged liability-driven investment (LDI), carry out periodic stress tests and consider concentration risks, as they continue to see the potential for volatility in the gilt market.
Read the annual funding statement, TPR’s analysis and accompanying press release.
Equality Act references to sex mean biological sex: For Women Scotland LTD v the Scottish Ministers
The Supreme Court has ruled that references in the Equality Act 2010 (EA10) to ‘sex’, ‘man’ and ‘woman’ relate to a person’s biological sex i.e., their sex at birth, and that this is not changed where a person has obtained a gender recognition certificate (GRC).
The key question posed was whether the Gender Recognition Act 2004 (GRA04) meant that references in the EA10 to ‘sex’, ‘man’ and ‘woman’ include people who have acquired that sex under a GRC (so a reference to a woman would include a ‘trans woman’ i.e., someone who was of the male sex at birth, but who has the protected characteristic of gender reassignment, and has received a GRC certifying that they have attained the female sex). The GRA04 states that when a full GRC is issued to a person, the person’s gender becomes ‘for all purposes’ the acquired gender, but ‘subject to provision made by [the GRA] or any other enactment or any subordinate legislation’.
The court found that the references in the EA10 meant biological sex for a number of reasons, including:
- As a matter of ordinary language, they believed that provisions relating to sex discrimination can only be interpreted as referring to biological sex, and to read them otherwise would make them incoherent in a number of places.
- The definitions should be used consistently throughout the act; the court rejected the finding of earlier judgments that definitions could be interpreted in some places to include a person with a GRC and others (where that approach would be incoherent) to refer to biological sex.
- To include people with a GRC would create a distinction between those who have the protected characteristic of gender reassignment and have obtained a GRC, and those who have not obtained a GRC, which would create difficulties in practice (as GRCs are confidential, so it would be difficult to identify who fell into each category) and create an inequality which does not appear to have been intended.
- The EA10 includes a specific protected characteristic of gender reassignment, defined distinctly from sex, which does not depend on having a GRC.
- The court did not believe that its interpretation would have the effect of disadvantaging or removing important protection under the EA 2010 from trans people: they could still access the sex discrimination provisions by virtue of being perceived to be their acquired sex—it is not necessary to declare biological sex to claim under these protections.
The direct impact of this judgment on pension schemes seems limited. Provisions in the GRA04 which relate to pension provision following issuance of a full GRC are unaffected. GRCs do not impact events before a certificate is issued (which could only be after April 4, 2005), so do not cover key time periods of sex inequality issues in pension schemes, such as the Barber window. However, further cases may be brought and schemes should be aware of the sensitivities in this area and consider carefully any issues that arise involving members with the protected characteristic of gender reassignment, particularly where a member has a GRC.
Read the UK supreme court judgment.
Government response to WPC report on DB schemes
The government has published a response to the Work and Pensions Committee’s (WPC) earlier report on DB pension schemes. The response provides insight on various current issues, including:
- Scheme surpluses: following its previous announcement that it will change the rules on accessing scheme surpluses, the government confirms that details will be published ‘this spring’ and states that there will be ‘stringent funding safeguards’ in the new rules. It notes that surpluses may be used to fund discretionary increases on pre-1997 pensions (which are not legislatively required to be increased), following concern about the erosion of value of these benefits, but there is no suggestion of new requirements or guidance to encourage or require surpluses to be used in this way.
- Trustees: the government will consider whether current trustee accreditation arrangements are robust enough. It intends to consult on the framework of trustee accreditation and trustee governance later this year. It will also consider how TPR and DWP could provide additional support for lay trustees.
- DB funding regime: the government and TPR will monitor the effectiveness and impact of the DB funding regime. The relevant regulations (the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024) will be reviewed within the next five years, and the DB Funding Code will be reviewed and revised ‘where appropriate’.
- Government consolidator: the government continues to ‘explore whether a small, focused Government Consolidator, run by the PPF, could be an option for schemes less attractive to commercial providers’. It will provide more information in its response to the Options for Defined Benefit Schemes consultation.
- PPF levy: the government will consider proposals to give the Pension Protection Fund (PPF) greater flexibility to reduce the levy it collects from DB pension schemes.
- PPF compensation: ministers are considering calls to review PPF compensation levels, in particular the lack of increases on pre-1997 benefits. The response notes the ‘very real impacts’ on affected members but also the potentially significant impact on public finances and need to balance different interests.
Read the government response.
Regulations for multi-employer CDC schemes expected in autumn
The government has announced that new regulations allowing collective defined contribution (CDC) schemes for multiple unconnected employers are due to be laid in the autumn. Subject to parliamentary approval, the intention is to bring the legislation and an updated TPR Code into force ‘as soon as practicable’. The pensions minister also confirmed his desire to deliver decumulation only CDC schemes.
Read the governments press release.
