Annual Funding Statement: Covenant assessment clarity welcomed

The regulator included the clarifications in its Annual Funding Statement, published yesterday, which included the ability to be proportionate for schemes that are less reliant on sponsor contributions.

Alex Beecraft, partner and head of covenant and security at Aon, said: “Three points stand out from TPR’s Annual Funding Statement: that professional judgement remains key to assessing covenant; that TPR is seeking a sea-change in the treatment of parent company guarantees; and that covenant longevity is central to making endgame decisions. 

“None of these points are new to those already applying the new requirements (although the clarity is helpful) and the key to an efficient valuation process remains for all parties to be proactive, proportionate, and pragmatic.” 

Helen Abbott, partner and covenant adviser at LCP, said: “It’s good to see TPR being clear that a proportionate approach can be taken to covenant assessment where future reliance on the employer is low, with the focus on quantifying what level of support the scheme is likely to require, and then confirming that the employer can provide ‘at least’ that.” 

Emily Goodridge, managing director at Cardano, praised several of the changes introduced in the 2025 Annual Funding Statement, including the idea that “low dependency is not no dependency”. 

In addition, Pension Protection Fund (PPF) guarantees are no longer considered adequate by TPR as they do not support achieving “low dependency”. 

PPF-related guarantees often mean contingent asset arrangements that are triggered only if the sponsoring employer becomes insolvent. The regulator said assessments of affordable contributions “should be based on the cashflows of the statutory employers only”. 

“If trustees run risk based on having such a guarantee and should this risk crystalise, this will lead to a longer recovery plan than if a look through to affordability was provided by the guarantor,” TPR said. “This will increase the likelihood that the scheme will not reach its low dependency funding target by the relevant date. 

“Schemes that are reliant on such guarantees may need to re-evaluate their journey plan or seek enhancements under the new Funding Code,” Cardano’s Goodridge said. 

TPR also highlighted that trustees do not need to seek enhancements to contingent asset arrangements if they are deemed sufficient to support a scheme’s journey plan.