Global menu

Our global pages


Pensions Regulator’s expectations on funding and communications in a crisis

  • United Kingdom
  • Pensions


The Pensions Regulator has issued its 2020 annual funding statement which provides more guidance for plans going through a valuation process and new guidance on communicating with members during the pandemic.

In this Speedbrief we set out the key messages for trustees and sponsoring employers from these recent publications. These are:

  • whilst the COVID-19 situation means that there is some flexibility around corporate funding, the Regulator does not want this to be abused. It expects trustees to step up their monitoring of covenant leakage in all its forms
  • trustees offering this flexibility should try and ensure that future employer contributions are linked to a recovery in “corporate health” (such as free cash flow or payments to other creditors) or plan investment performance, or that they are underpinned by contingent security
  • trustees should consider communicating with their DC members about the impact of the current financial situation
  • trustees issuing DB transfer values should “for the foreseeable future” send with these a template letter provided by the Regulator

Annual funding statement

The funding statement is primarily aimed at plans with valuation dates between 22 September 2019 and 21 September 2020, although any trustees and sponsoring employers considering funding issues should have regard to it.

The key message is that trustees and employers should work together to manage the immediate impact of COVID-19 and focus on long-term planning and risk management to protect members. Trustees should also be alert to the ongoing position of employers, covenant leakage (in all its forms) and be ready to require additional funding as things improve.

Other points to note are:

Timing of valuations: Plans close to completing their valuations (eg those with valuation dates in 2019) are not expected to take into account post-valuation experience in their valuations. However, trustees are expected to consider the current position in their recovery plans. Trustees should take into account what the employer can afford and include mechanisms to benefit the pension plan when things improve in the future.

Trustees with valuation dates in March and April 2020 may struggle to form a long term view on issues such as investment return and covenant strength. It would be reasonable for them to delay finalising assumptions until they have more certainty. However, even where there is uncertainty, the Regulator expects plans to finalise as much preliminary work as possible.

Whenever the valuation date is, the Regulator encourages trustees to adopt a long-term funding target (which will be required when the Pension Schemes Bill comes into force) and consider how their investment and funding strategy will meet that target. Long-term plans should usually allow for short-term investment volatility and should therefore only need some “short-term modifications” to deal with the current situation.

Changing valuation dates: Where a valuation date falls in the midst of the current crisis, trustees may consider (or their sponsoring employer may be asking them) to change it to avoid the impact of recent extraordinary market conditions.

The Regulator cautions that trustees should consider very carefully whether such a change would be in the best interests of members and the impact it would have on member security.

Trustees who do decide to change a valuation date can expect the Regulator to question their reasons for doing so.

Covenant: Trustees should do additional due diligence in relation to employer covenant strength in line with the Regulator’s guidance on employers experiencing distress as a result of COVID-19.

If the employer’s business could be affected by Brexit, the Regulator expects trustees to understand the potential impact of alternative negotiation outcomes with the EU, including the possibility of leaving the EU on World Trade Organisation terms.

Trustees should consider obtaining independent specialist covenant advice, particularly where the covenant is complex or deteriorating. In particular, trustees should:

  • significantly increase their monitoring until covenant visibility and strength are restored
  • identify key aspects of the covenant to track and have appropriate triggers for further action
  • discuss key risks with the employers and potential actions so that all parties are ready to respond when a trigger is breached

The Regulator may ask trustees to demonstrate that these discussions with the employer have taken place.

Dividends and covenant leakage: Although trustees should be supportive of employers in financial difficulties, where employers want to recommence dividends in the future, and deficit repair contributions have been reduced or suspended, there should be a legally enforceable agreement for contributions to increase when dividends are paid.

Where employers are seeking longer recovery plans on the basis of affordability, trustees should put in place appropriate agreements to ensure that covenant strength cannot be eroded by payments to the wider group.

The Regulator is not only concerned about dividends in this context but also other intra-group arrangements such as charges, fees, cash pooling, royalties, lending and “excessive executive remuneration”. This represents a significant step up from previous guidance.

Risk management: As in previous years, the Regulator has set out key risks for trustees to consider and expectations in relation to investment and funding. These vary depending on the strength of the employer covenant, the funding position of the plan and its maturity. Trustees need to identify which category their plan falls in and have regard to the Regulator’s expectations.

Regulator approach: The Regulator intends to take a proportionate approach. However, whilst it has adopted several easements in relation to COVID-19, including allowing an additional three months for completing the valuation process, it will “be ensuring these are not abused”.

Communicating with plan members

The guidance on communicating with members during the current crisis covers a number of areas and is aimed at both trustees and their plan administrators:

General: Trustees should ensure that members are aware of how to contact the plan to access member services if there have been any changes. They should also make members aware of any disruption to normal services.

Transfers: Trustees need to be alert to the risks of transfers in the current environment and support members to make informed decisions. This guidance sets out various things that can be done to help members including encouraging them to take advice.

Where a transfer is from a DB plan, for the foreseeable future, trustees and administrators are told that they should provide members requesting a CETV quote with this letter. The letter sets out issues that members should consider before making a decision and where they should go for guidance. Trustees and administrators must ensure that transfer processes are updated to include this letter or in the future they may be at risk of claims for maladministration. We are already working with trustees and sponsors who are sending out their own communication alongside the Regulator’s letter.

Trustees should monitor the number of requests for CETV quotes and which advisers are supporting the request. If there are unusual or concerning patterns, they are asked to contact the FCA on

Stopping contributions and ceasing membership: Where active members ask to opt out or cease contributions as a result of uncertainty around COVID-19, trustees should make them aware that in doing so they will lose future employer contributions and may lose any other benefits that plan membership provides, such as death in service and survivor benefits.

As the pandemic is brought under control, the Regulator suggests that trustees may want to contact members who have left and remind them of any rights they may have to opt in or re-join.

Scams: The guidance reiterates the Regulator’s concerns about the potential for an increase in scam activity and its expectations of what trustees should be doing to highlight the risks to members.

DC plans: The Regulator is aware that falls in the market and individual fund values as a result of COVID-19 might result in members wanting to switch funds, opting-out or being more vulnerable to scams.

Where trustees are already intending to contact members in the next few months, they should highlight: what current market volatility might mean to members retiring over different time frames; the need to think carefully and consider getting investment advice before switching funds (to avoid crystallising losses); the danger of scam activity in the current climate; and that free impartial guidance is available from the Pensions Advisory Service. Trustees will need to consider carefully whether to communicate with their DC members – there are arguments both ways – and to ensure that they don’t stray into giving financial advice.