What Is Scheme Funding?
A DB pension scheme's funding level compares the value of its assets (investments, cash, and other holdings) with the estimated cost of paying all the pensions it has promised (its liabilities). A scheme that is 100% funded has exactly enough assets to cover all its obligations. Below 100% means a deficit; above 100% means a surplus.
As of 2025, the aggregate funding level of UK DB schemes has improved significantly, with many now in surplus following rises in interest rates. However, individual scheme positions vary enormously.
How Funding Is Measured
There are several ways to measure a scheme's funding, each producing different numbers:
| Measure | What It Shows | Typical Use |
|---|---|---|
| Technical provisions | Ongoing funding on prudent assumptions | Triennial actuarial valuation |
| Buy-out basis | Cost of buying annuities for all members | Scheme wind-up assessment |
| Solvency basis | Whether assets cover benefits if scheme closed today | PPF Section 179 valuation |
| Accounting basis (IAS 19) | Corporate reporting of pension obligations | Company accounts |
The Triennial Valuation
Every DB scheme must conduct a full actuarial valuation at least every three years. The scheme actuary assesses:
- The current value of scheme assets
- The estimated cost of all promised benefits (liabilities)
- Whether the funding level is adequate
- What employer contributions are needed going forward
If the valuation reveals a deficit, the trustees and employer must agree a recovery plan to eliminate the shortfall. The Pensions Regulator (TPR) sets expectations for how quickly deficits should be cleared, typically within 6–7 years for most schemes.
What Drives Funding Levels?
Several factors cause funding levels to change between valuations:
- Interest rates — the single biggest driver. When interest rates fall, liabilities increase (because the present value of future pension payments rises). When rates rise, liabilities shrink. The post-2022 interest rate environment has significantly improved many schemes' positions
- Investment returns — strong asset performance improves funding; poor returns worsen it
- Inflation — higher inflation increases liabilities for schemes with inflation-linked benefits
- Life expectancy — longer lifespans mean pensions must be paid for longer, increasing liabilities
- Employer contributions — deficit repair contributions gradually close funding gaps
How to Check Your Scheme's Funding
You have several ways to assess your scheme's financial health:
- Summary funding statement — your scheme must send this to all members after each valuation. It shows the funding level and any deficit
- Annual report and accounts — available on request from your scheme administrator, these provide more detail on assets, liabilities, and investment strategy
- TPR scheme return — basic information about your scheme is filed publicly with The Pensions Regulator
- PPF 7800 index — shows aggregate funding for eligible schemes (not individual scheme data)
What Happens When Funding Is Inadequate
Recovery Plans
When a valuation shows a deficit, the trustees and employer agree a schedule of additional contributions to restore full funding. TPR expects most recovery plans to last no more than about 6–7 years, though longer periods may be justified if the employer cannot afford faster repayment.
Employer Covenant
The strength of the employer — its ability and willingness to stand behind the pension scheme — is known as the employer covenant. Trustees assess covenant strength when setting the investment strategy and agreeing contributions. A strong employer can support more risk; a weak employer means the scheme needs to be more cautious.
PPF Protection
If the worst happens and the employer becomes insolvent while the scheme is underfunded, the Pension Protection Fund provides compensation. See our detailed guide on PPF compensation levels for what you would receive.
Funding and Transfer Values
A scheme's funding position can affect the cash equivalent transfer values (CETVs) offered to members. Schemes in deficit may reduce transfer values to protect remaining members, while well-funded schemes may offer more generous values. If you are considering a transfer, understanding the scheme's funding position is essential context.
The New Funding Code
TPR introduced a new funding code in 2024 requiring schemes to have a clear plan to reach full funding on a low-risk basis by the time they are significantly mature (most members are drawing benefits). This long-term objective means schemes must progressively de-risk their investments as they mature, providing greater certainty for members.
Next Steps
Request your scheme's latest summary funding statement and review the funding level, deficit position, and recovery plan timeline. If you have concerns about your scheme's financial health, speak to an FCA-regulated pension adviser who can assess your individual position and options.