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The Pensions Regulator’s 2023 Annual Funding Statement

3 May 2023

The Pensions Regulator (TPR) has released its 2023 Annual Funding Statement (AFS). It sets out TPR’s expectations for trustees and employers of defined benefit (DB) schemes currently undertaking actuarial valuations.

What are the key messages?

The Statement is for all trustees and sponsors of defined benefit schemes but is especially relevant for schemes with valuation dates between 22 September 2022 and 21 September 2023.

The 2023 statement focuses on the impact of the sharp rise in gilt yields seen in 2022 and consequent actions trustees should be considering. The Pensions Regulator (TPR) identifies a number of areas for trustees to look at including re-thinking strategy, investment, covenant and mortality. As expected, there is a focus on locking in funding gains, reducing investment risk and insuring benefits where possible. TPR also acknowledges that there may be a reduction in life expectancies post Covid. Unsurprisingly, TPR urges trustees to consider the impact of higher interest rates on the employer covenant.

The key messages are:

  • Assess your funding position and re-think your strategy - Schemes which are ahead of plan should consider insuring some or all liabilities alongside other measures to lock in gains. Schemes which are behind plan should rebuild their funding plans to address the current deficit.
  • Investments – Schemes should review their asset allocations, especially the balance between matching and return seeking assets. Schemes should also review and, if necessary, reduce leverage levels in LDI funds.
  • Covenant – Reliance on covenant may have reduced but trustees should understand the impact of higher interest rates and higher energy costs on covenant strength.Trustees should ensure effective information sharing is in place.
  • Mortality – TPR expects trustees to review mortality assumptions to reflect the latest view of long term life expectancy.
  • For current valuations – Use the valuation as an opportunity to reassess your long-term funding and investment objectives and your time-frame for reaching those objectives.


The speed and magnitude of the decrease in assets and liabilities will have surprised many. Long term objectives …and associated funding and investment strategies may now need to be reviewed

What about the new funding code?

The consultations are complete and the new funding code and associated Regulations are expected now to come into force in April 2024. The delay from the original target date of October 2023 is to ensure “there is sufficient time for the Regulator and the industry to prepare for the new requirements”.

TPR confirms that, if you have a valuation date between 22 September 2022 and 21 September 2023, this will be carried out under the current funding regulations.

What are the key areas and actions?

Review your funding position

TPR notes that funding levels have improved for most schemes. Its modelling suggests that around one quarter of schemes are now fully funded on a buyout basis. Here the key message is that trustees should assess the funding position of their schemes and consider what actions could be taken to accelerate progress towards their long term target.

Where fully funded on a buyout basis – take advice and consider whether or not to insure. In most cases insurance will be the right approach, which means schemes need to get transaction ready to give themselves the best chance of obtaining terms in a crowded market that will only get busier. Actions include getting data ready, preparing a benefit specification and de-risking assets to match insurance pricing as far as possible.

Where funding has improved but is still below buyout – consider whether the funding target could be strengthened and whether assets can be de-risked to accelerate progress to your long term objective; ensure your funding and investment targets are aligned; consider aligning with the broad principles of the new funding code.

Where funding has deteriorated – a small minority of schemes have seen a deterioration in funding. In these cases, trustees should ensure they understand why the position has deteriorated and then rebuild their funding and investment strategies to address the current position.

Review your investment strategy

The sharp rise in global interest rates led to a very sharp fall in the values of both liabilities and matching assets. TPR notes that the impact will vary by scheme but in many cases allocations to matching and return assets may be out of balance. TPR also highlights the volatility seen in gilt markets during September and October 2022 and the issues this caused for some schemes with leveraged LDI holdings. In terms of actions, TPR suggests that trustees consider reviewing:

  • Future return requirements and associated asset allocations (to matching and return-seeking funds)
  • LDI arrangements including leverage levels and collateralisation process
  • Any allocation to illiquid assets including reliability of valuations, alignment with cashflow requirements and objectives and process for selling.

For details of TPR’s April 2023 guidance on LDI: Using leveraged liability-driven investment


Covenant remains key

TPR highlights that higher interest rates and high inflation will impact on employer finances through borrowing and energy costs. Although funding levels have improved for most schemes, TPR warns against complacency on covenant and suggests that trustees:

  • Continue to obtain and review financial information and business plans
  • Review the scope of covenant assessment and monitoring – do other factors need to be included?
  • Consider the short term impact of increased interest and energy costs
  • Ensure information protocols are followed and consider obtaining covenant advice where the covenant is complex or deteriorating
  • Consider scenario analysis to understand the sensitivity of covenant to economic changes
  • TPR also highlights the increased risk associated with corporate refinancing now we have moved from near zero interest rates to a higher interest rate environment. Trustees should factor increased interest costs into their assessments and should not finalise any covenant assessment until the terms of the refinancing are clear.

Life expectancy

TPR notes that mortality data has changed over the last few years due to the short term effects of Covid and the expected longer term impact. TPR urges caution but recognises that schemes should review mortality assumptions to allow for the expected longer term impact of Covid 19.

Interestingly, the Pension Protection Fund has updated its own mortality assumptions for the same reasons, leading to a reduction of around 2% in liabilities.

We suggest that trustees review their mortality assumptions, including a postcode analysis where appropriate, to ensure their mortality assumptions reflect both the latest national trends and the specific profile of their membership.

Revising recovery plans

TPR notes that some schemes, which are ahead of plan, may look to reduce or stop deficit reduction contributions (‘DRCs’) to reflect the improved funding position. Here, TPR expects trustees to consider the following points first:

  • Whether covenant has weakened and if so, whether the level of prudence in the Technical Provisions is sufficient.
  • Reducing the term of the recovery plan rather than the level of contributions payable.
  • Reducing or removing any allowance for investment outperformance in the Recovery Plan before reducing DRCs.
  • If shareholder distributions or other covenant leakage are material, it is unlikely to be appropriate to reduce DRCs.

Know your scheme and know what TPR expects

The key factors determining what TPR expects of trustees are employer strength, funding strength and maturity. Please see the table at the bottom of the following link to identify your group and what TPR expects.

Read the full Statement here: Annual Funding Statement 2023

If you would like to discuss how your scheme is affected, please get in touch with your usual contact at Cartwright or email our Head of Pension Strategy, Jonathan Seed.


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