Water sector reform – what is the impact on pension schemes?

Following the conclusions of the Cunliffe Report last year (which Burges Salmon summarised here), the UK water sector is on the cusp of significant reform. The promised introduction of a new regulator, forthcoming legislation and a revised long‑term direction for the industry are intended to improve resilience, stability and service delivery across the sector. For more information, see the articles Burges Salmon has previously written about some of the key changes anticipated (here and here). Further reforms continue to be announced, with a recent press release from the Government confirming that the anticipated Water Bill will remove caps on government share ownership in water firms. All of these changes are coming at a pivotal time when water companies are already under heightened scrutiny from regulators, investors and the public.

Simultaneously, there continue to be developments in the pensions landscape. For example, the Pensions Regulator (TPR) has sharpened its focus on employer covenant assessment and risk management, bringing in a suite of additional governance and risk‑related requirements. 

Given the changes across both the water sector and the pensions industry, where does this leave pension schemes that are sponsored by water companies? 

Pension schemes in the water sector

These coinciding reforms create a clear and timely opportunity. For both sponsors and trustees of water sector pension schemes, now is a great time to take stock of your pension scheme’s governance, funding and risk position. Proactive collaboration between employers and trustees will benefit both parties by ensuring compliance with evolving pension regulations, satisfying industry‑specific scrutiny, and strengthening the long‑term position of both schemes and sponsors.

With the recent changes, it is time for trustees and sponsoring employers to turn their attention to their pension schemes, but where should they start? While there are many aspects of scheme governance and funding that merit attention, we have outlined what we consider to be some of the key priorities for water sector schemes below:

1. Employer covenant

Employer covenant strength has become a central focus of TPR. Since the DB Funding Code came into effect, trustees of DB schemes have been legally required to assess the strength of the employer covenant. Trustees will need to demonstrate that they have given serious consideration to employers’ abilities to support their schemes, both in the present and future. This includes assessing: (i) the employer’s current and projected cash flow; and (ii) the nature and reliability of any contingent assets supporting the scheme.

This obligation has particular significance for the water sector in light of the conclusions of the Cunliffe Report, due to considerations including: (i) increased scrutiny and obligations on water companies, leading to financial resources being required for other projects and obligations (with therefore less available resources for pension schemes), (ii) the recommendation for a "minimum capital" requirement and reduced reliance on debt at water companies and (iii) concerns from investors and the public as to water companies’ longevity. 

It is important to remember that covenant assessment is not a one‑off exercise; trustees are expected to monitor the covenant on an ongoing basis. In a period of reform, where future regulatory requirements could have uncertain impacts on investment and funding options, this monitoring function is even more critical for schemes in the water sector. Open engagement between trustees and employers will be essential to ensure covenant assessments remain accurate and proportionate as the regulatory landscape evolves.  It also provides the opportunity for valuable insight into financial obligations and future risk, enabling informed strategic decision-making ahead of regulatory change. Collaboration with trustees and any scheme advisors involved in the assessment should therefore be encouraged. 

Importantly, trustees should look beyond financials. Operational performance is a key determinant of covenant strength and understanding investment plans and delivery expectations, particularly regulatory commitments, is an essential part of protecting member outcomes. 

2. Cyber Security

Cyber security is a growing concern for all pension schemes, but for those operating within the water sector there is an added layer of complexity.

• Firstly, pension schemes and their administrators hold vast amounts of personal data relating to members and their families. The water industry employs a significant number of people and therefore operates large schemes, amplifying the consequences of a data breach both in terms of scale and reputational damage. 
• Secondly, water companies form part of the UK’s critical national infrastructure. Cyber attacks targeting administrative systems, including pension scheme platforms, could potentially be used as gateways into wider operational networks associated with water treatment and supply. The consequences of such breaches could extend well beyond the misuse of personal data. 

TPR expects trustees to take cyber risk seriously and to have appropriate controls and policies in place. As a minimum, we recommend that each scheme has two cyber security documents in place:

• Cyber Security Policy: a proactive document setting out preventative measures; and
• Incident Response Plan: a reactive document detailing how breaches will be managed if they occur.

The current water sector reform presents an ideal opportunity for trustees to ensure that policies are not only up to date but also properly tested in order to reveal whether policies are easy to locate, understand and implement. Although now is a good time to reflect on schemes’ cyber security position, this does represent an ongoing risk that should be monitored regularly in line with TPR’s cyber security guidance and best practice. 

From an employer perspective, the cyber security risks faced by pension schemes should be understood as part of the risk profile of the wider company, and mitigation is important to satisfy regulators, investors and consumers. A secure pension scheme feeds into stable service delivery, one of the focal points of the reforms.

3. Own Risk Assessments

The Own Risk Assessment (ORA) is a TPR requirement for all schemes with over 100 members, and given the size of most water sector pension schemes, this obligation will apply. An ORA is an assessment of the practical operation of a scheme’s effective system of governance and can take the form of a standalone document or an index drawing together various reports. 

The first ORAs were due earlier this year for schemes with a 31 March 2026 year-end, with ORAs for other schemes being due as the year progresses. Trustees have an opportunity to use the process constructively. It is another chance for trustees and employers to come together to identify and address areas for improvement or enhanced monitoring. In particular, the ORA framework encourages schemes to consider emerging risks such as cyber security and climate change, both of which are especially relevant in the water industry.

The benefits are numerous: a well‑prepared ORA will strengthen scheme resilience while also contributing positively to the sponsoring employer’s broader risk management. Employers will be able to utilise a lot of the information gathered to assess their business, in line with the Government’s objectives of a more secure future for the water sector. 

Again, the ORA requires continuous monitoring, and this will serve to comfort stakeholders within the pension schemes and wider industry. 

4. Funding

DB schemes remain common in the water sector, even where they are closed to future accrual. 

Surplus

In recent years, the issue of DB scheme surpluses has gained attention; many schemes and their sponsoring employers have grappled with how to deal with a surplus, and as the rules stand it can be difficult to extract funds on an ongoing basis. 

Provisions within the Pension Schemes Act 2026 are intended to make it easier, in certain circumstances, to extract and apply surplus, including returning it to scheme members. Burges Salmon has written about surplus changes in light of the Pension Schemes Act here and here. Trustees and employers should be alert to the potential implications if this is a relevant consideration. 

For trustees, surplus issues will be a matter of careful consideration, requiring a review of scheme rules, member interests and the strength of the employer covenant. For water companies acting as scheme employers, surplus management is likely to become an increasingly relevant funding topic in a sector undergoing structural reform. 

Deficit 

Conversely, where a scheme is not in such a fortunate funding position, trustees and employers will need to focus on deficit recovery. Under Part 3 of the Pensions Act 2004 and the DB Funding Code, trustees must agree a recovery plan with the employer setting out how, and over what period, any shortfall against the scheme's funding objective will be eliminated. 

For water companies, there is an added sector-specific dimension, as set out on Ofwat’s targeted review of pensions webpage. In its price review in 2009, Ofwat set a pension deficit recovery period for each company (which extended into 2020-25 for some companies) and companies were generally allowed to recover 50% of those pension deficit allowances from customers. The position has, however, changed as any remaining deficits cannot be recovered from customers and instead it is "wholly up to management and shareholders to find ways to deal with these amounts efficiently”. Ofwat maintained this approach in its 2014 and 2019 price reviews. Given the competing demands on water companies' resources (as highlighted by the Cunliffe Report), trustees should ensure that deficit repair contributions remain affordable and appropriately prioritised, which reinforces the importance of ongoing covenant monitoring. 

Conclusion

The coincidental reforms in the water industry and pensions sector invite an open collaboration between trustees and employers which could benefit both parties, as well as the members at the heart of these pension schemes. Seizing new requirements as opportunities to strengthen and stabilise will be key for both pension schemes and the water companies who sponsor them. 

Our large Pensions and Lifetime Savings team has expertise covering cyber security, ORAs, covenant assessment and everything else trustees and employers may need help with. We are mindful of the unique challenges facing the water industry. Our preeminent water practice is uniquely placed to help during this period of vast reform.

Please contact Susannah Young, Samantha Howell or your usual Burges Salmon contact for more information.