The Pensions Regulator (TPR) has stressed the "vital" need for trustees and employers to work together to manage the immediate effects of Covid-19, with a focus on long-term planning and risk management.

In its Annual Funding Statement, the regulator outlined how schemes that follow TPR guidance can balance the impacts on employers, while also putting them in a stronger position to improve funding levels.

Building on existing regulatory guidance, the statement addresses how defined benefit (DB) schemes should approach forthcoming scheme valuations, with today’s update focusing on key issues around covenant assessments and affordability and design recovery plans in particular.

The regulator has emphasised that it expects trustees to approach valuations and scheme funding “in conjunction” with their employers, with the guidance particularly relevant to those conducting valuations between 22 September 2019 and 21 September 2020.

It also acknowledged that March and April 2020 valuations would be particularly “challenging”, with many trustees not having access to sufficient information to form a reliable view on long-term future returns from scheme investments.

As such, it clarified that it is “reasonable” for trustees to delay taking decisions about technical provision assumptions, “until more clarity emerges”.

It emphasised however, that it expects schemes to proceed with "as much of the preliminary valuation work as possible” in the meantime.

This follows confirmation from the regulator that around one in 10 employers have already requested a suspension in their deficit reduction contributions (DRC), with recent research revealing that a lack of covenant information was the key DRC deferral barrier for 47 per cent of trustees.

TPR reiterated that trustees should ensure dividends and other forms of shareholder return are also suspended when agreeing to any reduction or suspension in DRCs.

It also added however, that in addition to DRCs, where possible, TPR expects trustees to incorporate appropriate "incremental increases in contributions, which track corporate health recovery", especially if the scheme has taken on additional funding risk to support the employer’s recovery.

Commenting on the statement, The Society of Pension Professionals president, James Riley, added: “The document is clear that where a scheme is taking additional risk supporting a sponsor it should share in the sponsor’s recovery through increases to contributions.

“Schemes may be prepared to share some of the pain now but sponsors should recognise their need for exposure to the upside when things start to recover.”

The statement was based on recent market analysis by TPR, which revealed that the funding level of DB schemes with low exposures to equity markets and good levels of hedging should be in a “stronger position than might be expected”.

TPR chief executive, Charles Counsell, added: “At the end of December we were seeing a general improvement in funding levels, compared with the previous three years, but the situation now will be very different for many schemes due to the Covid-19 crisis.

“However, we don’t yet know the full impact the crisis will have on the pension landscape.

“What is clear is that Covid-19 is testing employers and trustees like never before and it is vital that they work together collaboratively.

“We are clear that the best support for a pension scheme is a strong employer and so we are here to support both groups in our role to ensure savers’ retirements are protected."

He concluded: “It is vitally important for all schemes to follow our AFS guidance, and the extra Covid-19 guidance we have issued and will regularly update, to strengthen their position for the tough times which lie ahead.”

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