Regulator issues annual funding statement for DB schemes

News alert 2026/01

At a glance

The Pensions Regulator has issued this year’s DB Annual Funding Statement. It is the second such Statement under the new DB funding regime and is particularly relevant to “Tranche 25/26” schemes – valuations with effective dates for the 12 months starting from 22 September 2025. 

Key actions for trustees and scheme sponsors

• Consider the content of the Statement and engage early and collaboratively with advisers when undertaking a Tranche 25/26 valuation. 
• For the many well-funded schemes, increase focus on the scheme’s endgame and potential future use of surplus. Valuations are a great opportunity to review your scheme’s long-term objective and future strategy. 
• Be alert to the potential effects on investments and employer covenant of recent geopolitical and trade uncertainty. 
• Ask advisers whether the analysis they have done is impacted by the clarifications set out in the three Appendices to the Statement. 

The detail

On 6 May 2026 the Pensions Regulator issued its 2026 Annual Funding Statement, aimed at trustees and sponsors of DB pension schemes, along with an accompanying analysis. The Statement is focussed on “Tranche 25/26” schemes – those with valuations with effective dates between 22 September 2025 and 21 September 2026 (the second tranche falling under the new funding regime). However, it is also relevant to all DB schemes as it captures key information relating to the new funding regime and includes in its appendices answers to common queries received thus far. 

In this News Alert we step through the main aspects of the Statement. 

The Regulator’s key messages 

With 90% of schemes estimated by the Regulator to be in surplus on a technical provisions basis as at 31 December 2025 and with 80% estimated to be in surplus on a Regulator-derived low dependency basis, the Regulator expects most schemes to be shifting their focus from deficit recovery to endgame planning. The Regulator points to its endgame guidance published in June 2025 and its plans in relation to the modified surplus release mechanism provided for through the Pension Schemes Act 2026, which is expected to come into force in 2027. The Regulator also reiterates its expectation that around 80% of schemes should be able to utilise the Fast Track approach to scheme funding valuations.      

Introduction 

The Regulator’s analysis estimates that aggregate funding levels (on a technical provisions basis) were 124% as at 31 December 2025 with about 10% of schemes in deficit on this basis and that 60% of schemes were in surplus on a buy-out basis. The Regulator expects little change has taken place over the subsequent three months but recognises that recent trade and geopolitical tensions have increased uncertainty, including around interest rates, inflation and global economic growth. Volatility has risen sharply, which may influence scheme funding positions if it continues. 

The Regulator points to the evolving nature of valuations, moving away from budgeting for deficit recovery to informing the development or refinement of endgame plans and says that the long-term objective set out in the statement of strategy has become a key reference point. It says that such statements should therefore be “live” documents that evolve as endgame plans are refined and should change between valuations accordingly. They should also be driving the valuation process, rather than being a post-valuation by-product. 

Given these developments the Regulator intends to make some changes to its regulatory approach and assessment of valuation submissions. However, this seems to be something for the future. This includes a review of the definition of low-risk schemes for the purposes of submitting a statement of strategy, particularly how it applies to schemes that have a buy-in covering all members. 

The Regulator is not making any changes to its Fast Track parameters for Tranche 25/26 schemes from those published in November 2024, but does recognise that market conditions have changed since those parameters were set using conditions as at 31 March 2023 and so might update the Fast Track technical provisions parameters for Tranche 26/27 schemes. The Regulator may in future make changes in other areas or publish additional guidance. 

Funding strategies 

As last year, this section of the Statement groups schemes into categories according to their funding levels, but this time round there are four categories rather than the previous three: 

• Well above low dependency (110% funded or more) – the Regulator expects that the focus for these schemes will be on finalising and implementing the endgame, with the Regulator calling for those choosing to run on to consider their policy on surplus, on which a statement is to be published shortly. 
• Just above low dependency (100% to 110%) – the Regulator expects that a scheme’s focus here will be on endgame planning, accepting that options may be more limited than for those in the group above. Covenant assessment should be proportionate and related to the level of reliance placed on it. 
• Above technical provisions but below low dependency – the Regulator’s suggested focus is on ensuring the scheme continues on the path to achieving the low dependency objective by the relevant date.  
• Below technical provisions – the Regulator calls on such schemes to address the deficit as quickly as the employer can reasonably afford. 

Undergoing a valuation under the new DB funding regime 

In this part of the Statement the Regulator emphasises the more integrated valuation process required by the new regime and the benefit of early and ongoing collaboration between trustees, employers and advisers, provides some useful links to Regulator guidance and introduces three Appendices to the Statement where more detail is set out on aspects of the valuation process in response to common queries raised by those already submitting valuations: 

• Appendix 1 – this sets out the Regulator’s clarifications on assessing and monitoring the employer covenant. The Regulator confirms its position that where trustees determine that covenant support is insufficient it should be classed as inadequate (noting that doing so on its own would not typically trigger regulatory engagement). It asks to have visibility of all contingent assets the scheme has access to, regardless of whether they are actively being relied on to support funding and investment strategy risk. The Regulator also notes how value can be ascribed to a guarantee that does not meet the “look-through” criteria set out in the funding code and covenant guidance. 
• Appendix 2 – provides a number of clarifications on supportable risk, including the treatment of surplus, asset-backed contributions and calculating a scheme-related stress event. There is also reference to open schemes and their longer timeframe to the relevant date meaning they should be able to justify holding risk for longer, and there is guidance on how to treat deficit reduction arrears within scheme asset figures. 
• Appendix 3 – contains a number of clarifications on the low dependency funding basis and the low dependency investment allocation, including around the high resilience test, the importance of liquidity in the funding and investment strategy and the inclusion of expense reserves within low-dependency liabilities.  

General considerations 

After reprising an earlier message that most schemes should now focus on endgame planning rather than deficit repair, the Statement notes that the employer covenant supporting schemes remains integral when assessing the level of supportable risk in a scheme's journey plan and emphasises the importance of covenant assessment and monitoring. 

Trustees are then asked to: 

• monitor the risks arising from potential cyber incidents, given that this has become an area of increasing concern for trustees and employers; 
• understand the potential implications of climate change and wider sustainability issues; 
• recognise the potential impact of ongoing macroeconomic uncertainty on both scheme investments and the employer covenant, ensuring that near-term liquidity and cash flow requirements are securely met, while maintaining a resilient investment strategy and putting in place appropriate governance and controls; 
• work closely with scheme administrators to identify and address any data issues; and 
• consider and make use of the Regulator’s Virgin Media guidance when resolving uncertainties regarding the validity of past amendments to benefits, noting there may be cases where the outcomes have implications for data records or benefits which underpin scheme valuations.