UK defined benefit (DB) pension schemes are still adjusting to the updated DB Funding Code, one year since it was introduced, Aon's analysis of the first round of valuations under the new framework has found

The DB Funding Code, introduced in September 2024, was described at the time as one of the most significant developments for pension schemes since the 2005 Pensions Act.

Aon associate partner, Emma Moore, noted that while most schemes are in a stronger position than when the Code was first proposed, challenges remain.

She explained that “the baseline for funding standards has been raised both before and since its introduction last year”, adding that most schemes have been able to continue with existing practices and remain compliant.

However, Moore acknowledged that “there is a minority for whom the new regime has meant more significant change”, particularly more poorly funded schemes.

These schemes, she warned, are being forced to consider whether additional security is available to strengthen their position, and where this is not viable, the Code has “done little to improve the situation”.

Meanwhile, the covenant of DB schemes has also been one of the most significant areas of change.

According to Aon partner, Alex Beecraft, the Code and related covenant guidance have brought the “expected challenges for schemes, particularly where parent company guarantees are significant or covenant information is limited”.

He said the issues vary for each scheme, but the regime has allowed some flexibility and “many stakeholders have been willing to be pragmatic when addressing them”.

Beecraft suggested that the greater integration of the covenant with actuarial and investment considerations could deliver better long-term outcomes: “As a growing number of flexibilities become available to deliver better outcomes for all stakeholders, explicitly recognising how covenant is the foundation of pensions strategy is central to capitalising on them.”

The Pensions Regulator (TPR) has also underlined how the landscape has shifted, stating in its first Annual Funding Statement under the new regime that “most DB schemes are now in surplus, both on technical provisions and, for many, on a low dependency basis”.

It said the new regime should encourage trustees “to move their focus from deficit repair towards long-term planning for endgame, including buy-ins, buyouts or cashflow matching”.

TPR also emphasised that the covenant remains at the heart of the Code, stressing that “trustees must be able to demonstrate that any risk inherent in their funding and investment strategy is supportable by the employer covenant”.

---