Annual Funding Statement 2026

This statement is for trustees and sponsoring employers of occupational defined benefit (DB) pension schemes. It is particularly relevant to schemes with valuation dates between 22 September 2025 and 21 September 2026, now known as Tranche 25/26 (T25/26) to reflect the calendar year (previously known as Tranche 21 or T21).

It is also relevant to all DB schemes as it captures key information relating to our new DB funding code of practice.

Published: 6 May 2026

Key messages

Most schemes continue to see positive funding levels. Our estimates as of 31 December 2025 indicate that around:
- 90% of schemes are in surplus on a technical provisions (TPs) basis
- 80% of schemes are in surplus on a TPR-derived low dependency basis, with 60% of schemes funded at more than 110% on this basis
- 60% of schemes are in surplus on a buy-out basis
In line with last year, we expect most schemes in this tranche to be shifting their focus from deficit recovery to endgame planning. Our new models and options in defined benefit pensions schemes guidance, published in June 2025, will support trustees when considering their endgame options.
New legislation relating to surplus release is included in the Pension Schemes Act 2026, with details to follow in regulations that the Department for Work and Pensions will be consulting on. Around the same time, we will publish a statement providing early views on the issues trustees should consider around surplus release. Later this year, we will consult on more detailed surplus guidance to sit alongside the final regulations, which are expected to come into force in 2027.
Experience to date reflects our estimate that around 80% of schemes should be able to meet Fast Track, enabling us to reduce regulatory burden, as these schemes can provide less information as part of the statement of strategy.

Introduction

Our analysis indicates that, on a TPs basis, the aggregate funding level as at 31 December 2025 was 124%, with about 10% of schemes expected to be in deficit. On a buy-out basis, around 60% of schemes were in surplus. However, funding positions vary significantly between individual schemes, and aggregate figures will not reflect all scheme circumstances.

Between 31 December 2025 to 31 March 2026, we expect aggregate funding levels to remain broadly similar, albeit with slightly lower liabilities and asset values. We recognise that recent trade and geopolitical tensions have increased uncertainty, including around interest rates, inflation and global economic growth. Volatility has risen sharply and, if this continues, it may influence scheme funding positions.

For more detail, see the accompanying analysis supporting this statement.

Given current funding levels, we recognise that valuations are taking on a different significance for many schemes. Historically, when schemes were in deficit, valuations were primarily a budgeting exercise focused on determining the level and pace of deficit recovery and, where relevant, putting in place appropriate security to protect against weakening employer support.

As funding positions improve, valuations are increasingly becoming a strategic tool, informing the development or refinement of endgame plans and providing a structured opportunity to assess progress against long-term objectives.

As the role of valuations evolves, the long-term objective in the statement of strategy becomes a key reference point. Statements of strategy should be 'live' documents that evolve as endgame plans are refined and should change between valuations accordingly. They should be driving the valuation process, rather than being a post-valuation by-product.

While the rigour and discipline of the triennial valuation process remains essential, we believe some changes to our regulatory approach and assessment of valuation submissions may be appropriate given these developments.

Fast Track may not be the right approach for all schemes. However, where a scheme adopts our Fast Track parameters, it can provide less evidence and explanation in the statement of strategy and it is less likely we will engage with the scheme. Experience to date for T24/25 is consistent with our expectation that 80% of schemes could meet Fast Track at minimal or no cost to the employer.

Schemes following the Bespoke route, which allows greater flexibility for scheme-specific approaches, will need to provide more evidence in the statement of strategy. Both approaches are equally valid.

For T25/26, we are not making any changes to the Fast Track parameters published in November 2024. We recognise that market conditions have changed since those parameters were set using conditions as at 31 March 2023, particularly with materially higher gilt and high-quality corporate bond yields and stronger equity markets. This may imply lower expected returns on growth assets relative to gilts than previously.

We will continue to keep these under review and, if current market conditions persist, we may consider updating the TPs parameters for T26/27 valuations.

We are keeping the other conditions required to meet Fast Track, under review. We are also reviewing the definition of low-risk schemes for purposes of submitting a statement of strategy, particularly how this applies to schemes that have a buy-in covering all members.

In future, we may implement amendments, add clarificatory wording to the relevant documentation, or publish additional guidance. We recognise that material changes to the Fast Track submission tests and conditions, or the definition of low-risk guidance, can affect a scheme’s approach to its valuation, and we will be mindful of this impact when making any changes.

Once we have received and assessed the bulk of the valuation submissions for T24/25, we plan to analyse the new data provided in the statements of strategy and publish that analysis. This will help provide greater transparency around the different approaches' schemes are taking to meet the new requirements.

Over time, we will use the data received from schemes, including information from statements of strategy, to identify emerging risks across individual schemes and the wider pensions landscape. This will enable us to respond to these risks in a more targeted and proportionate way. We will also use this data to support publications and inform our response to future legislative changes.

Funding strategies

As in previous statements, we have grouped schemes into funding categories. This year, Group 1 is divided into two sub-groups.

Group 1A: funding level well above low dependency (110% funded or more)

Focus: Finalising and implementing the endgame.

Schemes with an objective to buy out in the short term are likely to prioritise locking down investments to minimise volatility of the buy-out funding level.

Schemes with an objective to run-on in the medium to long term may adopt a different investment approach carrying more risk. Trustees should determine the degree of reliance on the employer covenant needed to support the risk, considering the current funding level and the risk of employer insolvency, and monitor the covenant accordingly.

We expect schemes that are running on to consider their policy on surplus. We will be publishing a statement shortly on the factors for trustees to consider when considering surplus release.

See our new models and options in defined benefit pensions schemes published in June 2025 for more detail.

Group 1B: funding level at or just above low dependency (100% to 110% funded)

Focus: Endgame planning.

Options available to schemes in this group may be more limited than in Group 1A and may involve taking some limited investment risk to improve the funding position to a level where the chosen endgame (buy-out, run-on, consolidator) becomes feasible. As for Group 1A, trustees will need to determine the extent to which the scheme will be relying on the employer covenant to support this risk. We expect proportionate monitoring of the covenant according to the level of reliance placed upon it.

Group 2: funding level is above TPs but below the low dependency funding target

Focus: Maintaining progress towards low dependency by the relevant date through ongoing monitoring and management of downside risks.

Group 3: funding level is below TPs

Focus: Addressing the deficit.

TPs should align with the scheme’s journey plan to low dependency. The level of risk should reflect employer covenant support and, subject to that, scheme maturity, with deficits recovered as quickly as the employer can reasonably afford.

Undergoing a valuation under the new DB funding regime

This will be the first time schemes in this tranche complete their valuations under the new DB funding regime.

As highlighted in the last year’s Annual Funding Statement, the new regime requires a more integrated valuation process, with early and ongoing collaboration between trustees, employers and advisers.

We expect trustees to begin the valuation process by considering the scheme’s long-term objective and journey plan before choosing a Fast Track or Bespoke approach.

Please review the following areas of guidance when beginning your valuation process:

Statement of strategy consultation response – Key themes identified in the responses to the consultation and how we have sought to address concerns raised.
Fast Track submission tests and conditions – Tests and conditions a scheme must satisfy to meet the Fast Track parameters for schemes submitting a valuation.
Assessing covenant: detailed guidance – Practical guidance for trustees of defined benefit (DB) schemes on how to assess and monitor the employer covenant.
Scheme valuation – Tools and information to help prepare and submit the statement of strategy and other valuation documentation relating to an actuarial valuation. Trustees will be able to use the new digital service to complete their statement of strategy and submit it alongside their other valuation documents.

Common queries from those preparing to submit their valuations are addressed in the appendices to this statement.

Some themes of particular interest are as follows:

Supportable risk, and how TPs surplus and asset-backed contributions should be allowed for in the assessment of that risk. We've provided additional clarification in appendix 2 of last year’s Annual Funding Statement on how trustees should approach this assessment, addressing specific concerns or questions, and have provided further clarification below.
The approach to setting the expense reserve in the low dependency liabilities.
How to assess high resilience for the low dependency investment allocation (LDIA).

General considerations

DB schemes have seen significant changes to their funding levels over the last three years, with around 80% fully funded on a TPR-derived low dependency basis. See our Annual Funding Statement analysis 2026 for more information. As a result, most schemes should now focus on endgame planning rather than deficit repair.

The employer covenant supporting schemes remains integral when assessing the level of supportable risk in a scheme's journey plan. As a scheme’s funding position improves, covenant assessments should shift increasingly towards ongoing monitoring and managing downside risks, to ensure that progress towards the long-term objective is protected. A more detailed covenant assessment may still be required if funding levels are weaker, the scheme is large relative to the employer or high levels of risk are being taken.

The potential impacts from cyber incidents, have become an area of increasing concern for trustees and employers. These issues can materially impact the employer covenant through impacts on their business activities, operations and supply chains. We expect trustees to monitor these risks, with the frequency and depth of monitoring proportionate to the circumstances of the employer and the scheme.

Climate change and wider sustainability issues, including related transition and physical risks, continue to be a concern for trustees and employers. Trustees should work with the employer and their advisers to understand the potential implications. Trustees should review our Climate-related governance and reporting guidance.

Although many trustees are entering their valuation cycle from a relatively strong funding position, it remains essential to recognise the potential impact of ongoing macroeconomic uncertainty on both scheme investments and the employer covenant. Trustees should ensure that near-term liquidity and cash flow requirements are securely met, while maintaining an investment strategy that remains resilient to shifts in the economic environment and to the evolving risk appetite of both the trustee board and the employer. Our report Market oversight: Market volatility and what trustees should do sets out our expectation of all schemes to have high standards of investment governance.

Where these factors could have a material impact on an employer's cash flows and prospects, trustees must consider whether the current level of risk the scheme is running remains appropriate. Where risk-taking is no longer supportable, trustees should adjust their journey plan to low dependency.

Taking this into account, trustees should put in place appropriate governance and controls and have a clear understanding of the risks being run within the scheme's investment strategy. Trustees must ensure that robust and effective operational processes are in place to enhance scheme resilience to market shocks and to reduce risks to acceptable levels.

We have issued guidance on scheme member data quality. Data quality is crucial because pensions dashboards and scheme operations rely on accurate, complete and up-to-date information to correctly identify members and provide them with the right information at the right time. High quality data ensures effective oversight and helps reduce compliance risks. We encourage trustees to work closely with their administrators to ensure that any data issues are identified and addressed.

We are undertaking a comprehensive review of the data requirements for the DB and hybrid scheme return in the context of the funding code and statement of strategy, with changes scheduled for implementation from the 2027 scheme return onwards. For example, the 2026 scheme return included a request to submit a covenant rating, which we recognise is not aligned with the new funding code and covenant guidance.

We have also recently published guidance for trustees and employers on resolving issues arising from the 'Virgin Media' case, which created uncertainty across the industry regarding the validity of certain past amendments to benefits. The remediation measures in the Pension Schemes Act 2026 provide a route to resolve these issues, and we urge trustees and employers to consider and make use of this guidance. Although unlikely, there may be cases where the outcomes have implications for scheme data records or for the benefits on which upcoming valuations are based.

Appendix 1: Clarifications on assessing and monitoring the employer covenant

TPR’s view on an inadequate covenant

We note that there will be instances where a scheme cannot comply with the principle for assessing supportable risk through the journey plan because of limited covenant support available. See the inability to support risk in Investment and risk management considerations section of the code.

In such cases, the covenant strength should be classified as inadequate, and we would expect the trustees to acknowledge this within the statement of strategy.

We want to emphasise that an ‘inadequate’ covenant, on its own, would not typically trigger regulatory engagement. We are more likely to engage where trustees have assessed the covenant as adequate, but the surrounding circumstances strongly indicate that this assessment may not be justified.

Contingent assets where no reliance is placed on them to take further funding and investment strategy (FIS) risk

We recognise that the current statement of strategy asks trustees to include only those contingent assets on which the scheme is relying to support FIS risk. However, based on our review of recent valuation submissions, we believe it would be beneficial to have visibility of all contingent assets the scheme has access to, regardless of whether they are actively being relied on to support FIS risk.

Where trustees wish to provide details of such contingent assets, these can be entered into the statement of strategy as an ‘Other contingent asset’ with a zero-value assigned. When selecting the type of contingent asset in field OA 1.0, trustees should choose ‘Other’ and add relevant commentary on the specific details of the contingent asset – such as the actual value of the asset – in OA 2.0. This approach enables us to develop a more complete picture of the full range of contingent assets available to the scheme.

Non-look through guarantees

Where a guarantee does not meet the 'look-through' criteria set out in the funding code, value can still be ascribed to it in the statement of strategy. Trustees can record the details of such guarantees within the ‘Guarantees’ tab by selecting the 'Non-look through guarantee' option. They should then follow the guidance in our funding code and covenant guidance to determine an appropriate value.

Appendix 2: Clarifications on supportable risk

How to treat surplus when assessing supportable risk

We would expect trustees to devise a FIS appropriate to their scheme’s circumstances, and then test whether it is supportable using the 'Principles for assessing supportable risk over the reliability period' in the journey planning section of the DB funding code.

If there would be a deficit on the proposed TP basis, we expect this to be included in the projection of the scheme’s funding position at the end of the reliability period.

If there would be a surplus on the proposed technical provisions basis at the valuation date, the trustees can choose whether or not to take this into account in that projection, provided that:

Trustees recognise that surplus at the valuation date is a point-in-time assessment. The value of surplus can materially change over time, especially where the investment strategy includes a high proportion of growth assets to support a higher discount rate.
Any surplus which has been, or is likely to be, earmarked for other purposes – for example covering the cost of future DB accrual, paying discretionary benefits, paying a refund to the employer, or subsidising employer contributions into a DC section – should be excluded from the assessment of supportable risk.
If there is a change in the planned use of surplus in between valuations, for example if surplus starts to be used to pay discretionary benefits, trustees should revisit their assessment of supportable risk.

Where surplus is allowed for in the assessment, there should still be a margin between the level of risk the employer covenant can support and the risk the scheme actually takes. We would not expect trustees to rely on the full surplus amount to support a higher-risk strategy.

It would also be unusual to materially increase the risk in funding and investment strategy compared to the original proposals purely because of the scheme’s strong funding position at the valuation date. If we engage with trustees in relation to the valuation and find the scheme’s strategy had been materially changed as a result of allowing for a TP surplus, we may ask the trustees to justify their approach.

How asset-backed contributions (ABCs) can be treated when assessing supportable risk

When assessing supportable risk, trustees can treat ABCs in one of two ways:

Option 1: Recognising the ABC as a scheme asset

Under this approach, trustees recognise the value of the ABC’s future cash contributions directly within the scheme’s assets. This effectively reduces the level of risk that the employer covenant needs to support during stress events.

Trustees should only use this approach where future contributions are reasonably certain and backed by a high-quality contingent asset (for example, cash or freehold property) that meets the relevant criteria in the funding code. Where this is not the case, trustees should unpack the ABC, in line with Option 2.

Under this option, trustees would not normally attribute any additional value to the ABC when determining available covenant support for the supportable risk assessment. This aligns with the principle in the funding code that an ABC included in scheme assets should not be used to justify additional funding or investment risk, as this would result in double counting.

Option 2: ‘Unpacking’ the ABC and treating payments as contributions

Trustees can choose to ‘unpack’ the ABC. In doing so, the value attributed to the ABC is removed from the scheme’s asset base, and future cash payments are treated as if they were deficit repair contributions (DRCs), given they are committed payments to the scheme. This will reduce the TP deficit, or increase scheme surplus, over the reliability period.

For ABC payments extending beyond the reliability period, trustees should carefully consider whether covenant reliance should be placed on those future payments. If these future payments are backed by a high quality contingent asset that meets the relevant criteria, trustees may consider allowing for this additional value in a similar way to other contingent assets.

Treatment of collateral when assessing supportable risk

As the scheme already benefits from the value of the ABC’s future cash flows, trustees would not normally attribute any additional value to the ABC’s collateral in the supportable risk test, to avoid double counting.

A possible exception is where the cap on any claim against the collateral materially exceeds the future value of contributions. If the trustees choose this approach, they should use narrative field ECI 20.0 in the statement of strategy to provide appropriate justification.

Statement of strategy reporting requirements

When adopting either Option 1 or Option 2, trustees should:

include the value of the ABC within the scheme asset figures in the statement of strategy, and complete all relevant ABC data fields
if Option 2 (‘unpacking’ the ABC) is used, include the annual payments within the ABC income stream tab, rather than the DRC tab
clearly state in narrative field ECI 20.0 which option has been applied

Our Asset-backed contributions guidance provides more detail and factors for trustees to consider.

Calculating a scheme-related stress event

The investment risk measure input to the statement of strategy (item IRC 2.0) should be the risk measure it used in calculating supportable risk. We will be updating the guidance in the statement of strategy shortly to reflect this change.

The most common approach for assessing this risk in a scheme’s notional investment strategy is a Value at Risk (VaR) measure, typically expressed as a one-in-six (16.67%) stress on both assets and liabilities.

Trustees should submit a risk measure that covers the full period used for the supportable risk assessment (no longer than the reliability period), rather than a one-year downside event (unless the period for that assessment is one year).

Journey plan de-risking considerations for open, immature schemes

In line with the principles of supportable risk, more immature schemes will be able to justify holding risk for longer, which can be reflected through their de-risking journey plan. This is particularly important for open schemes, whose timeframes to reach their relevant date will be longer than a typical closed scheme. In addition, our comments in Appendix 2 of Annual Funding Statement 2025 regarding the role of covenant longevity in setting a scheme’s journey plan to low dependency are also relevant in this regard.

Trustees should ensure that the level of risk across the entire journey plan remains appropriate in the context of the factors set out in the journey planning section of the code.

How to treat DRC arrears within scheme asset figures

We have identified a subset of schemes including unpaid arrears in scheme assets for the purpose of the valuation. If arrears remain unpaid at the date the valuation is submitted, these should not be included as a scheme asset, unless clear justification is provided. This is because they represent an outstanding debt owed to the scheme, the recovery of which is uncertain.

Appendix 3: Clarifications on the low dependency funding basis and the low dependency investment allocation

Interaction between the low dependency investment allocation (LDIA) and the code example for demonstrating high resilience

The LDIA does not need to reflect the schemes’ actual investment strategy. It only needs to represent the assets notionally held in respect of the low dependency funding basis (LDFB) liabilities. Accordingly, the LDIA should exclude assets in excess of LDFB liabilities.

In the statement of strategy (item FIS 11.0), trustees may choose whether to report the intended investment allocation to growth and matching assets at the relevant date for all scheme assets, or only for the assets notionally held in respect of the LDFB liabilities.

The high resilience test calculation should only be carried out on the assets notionally held in respect of the LDFB liabilities.

When setting the LDIA, trustees should focus on the principles of high resilience set out in the code, such as robustness and limited reliance on the employer. This includes considerations beyond the ability to return to full funding, including hedging, liquidity and certainty of cash flows.

We expect trustees to carry out a suitable test of the funding level resilience of their chosen LDIA by assuming they are fully funded on LDFB and assessing the funding level impact of a stressed or downside scenario. Trustees should be satisfied that the scheme could return to full funding within a reasonable timeframe, with limited reliance on the employer, while accounting for benefit payments and expenses.

When assessing high resilience following a stress event, trustees should consider the following:

Return assumptions: The assumptions for different asset classes can reflect those expected following that stress. For example, the expected returns on certain asset classes may be higher if the stress includes a material fall in the value of those assets.
Cash flow-generative matching assets: Where the LDIA contains cashflow generative matching assets, short-term market value changes may not affect the ability of these assets to meet liability cash flows. In these circumstances, trustees may use a dynamic discount rate to value LDFB liabilities, as described in the code: Low dependency funding basis.

Where the LDIA does not meet code’s high resilience test

Ultimately, trustees must be satisfied that the LDIA complies with legislation. Failure to meet the test in the code does not necessarily mean the LDIA needs to be changed. If a scheme’s LDIA does not meet the example resilience test, trustees should understand the reasons and assess whether the strategy remains appropriate, including whether it supports the actuarial assumptions used for the low-dependency funding basis.

Trustees should consider the risks identified, the scheme’s maturity and cash flows at the relevant date, and the extent of reliance on the employer covenant. Where risks are higher, trustees should consider adjusting the LDIA strategy – such as changes to the level of interest rate and inflation hedging, the allocation to growth assets, or sub-investment grade credit. Where trustees proceed with the strategy, they should clearly document their rationale and be prepared to demonstrate how members’ benefits remain adequately protected.

The Long-term planning – Low dependency investment allocation section in the DB funding code outlines more detail and factors for trustees to consider.

Schemes past their relevant date with a low-dependency deficit

Schemes that have not reached their relevant date can take a more proportionate approach. However, schemes that have passed their relevant date have fewer levers available.

As schemes mature and become increasingly cashflow-negative, funding levels may come under pressure. With limited time to benefit from compounding investment returns, and with ongoing benefit outflows reducing the asset base, funding positions can deteriorate faster than in earlier stages of a scheme’s life cycle.

Increasing risk in these circumstances would increase reliance on the employer and undermine the structural resilience required at significant maturity. This is contrary to the intent of the legislation and our expectations in the code.

Accordingly, schemes that have passed their relevant date should seek to repair any low-dependency deficit primarily through additional contributions – aligned with reasonable affordability principle 4 within the employer covenant guidance – and/or contingent support that can be called upon if cash flow is constrained, rather than by increasing investment risk.

The importance of liquidity in the funding and investment strategy

Trustees should ensure their investment and funding strategies allow the scheme to meet short-term liquidity and cash flow needs, even during periods of economic or market uncertainty. We expect trustees to operate robust liquidity and governance processes to ensure schemes remain resilient.

In the statement of strategy (item LIQ1.0), trustees must record the proportion of highly liquid investments available to meet unexpected liquidity needs, such as LDI collateral calls. Highly liquid investments must be accessible within five working days, including notice and settlement periods, regardless of timing or market conditions and without incurring any significant cost or loss.

Expense reserve within low-dependency liabilities

We recognise many schemes are including an expense reserve in their low-dependency liability calculations for the first time. For schemes, particularly smaller schemes where fixed costs are large relative to the size of the scheme, it can have a significant impact on the total liabilities.

Where the employer is not required to pay expenses, low-dependency liabilities should include a reserve representing the discounted value of all non-investment expenses expected to be incurred from the relevant date onwards. This can be estimated proportionately and pragmatically, with approximate methods acceptable for long-dated and uncertain expenses.

When calculating the reserve, trustees can allow for expected changes in membership profile and size, as well as inflation.

The agreed long-term strategy, documented in the statement of strategy, is central to determining which expenses to include and over what period. For example:

Where the strategy is to buy out shortly after the relevant date, the reserve should cover only anticipated expenses over that period, plus any material additional costs connected with the buy-out.
Where the strategy is to run on, the reserve should broadly reflect expenses over the expected remaining lifetime of the scheme after the relevant date.

For closed schemes, there could be a time when it makes economic sense to buy out the liabilities. Trustees may reflect this in the expense reserve calculation. This could include phasing in a full reserve where timing remains uncertain. However, if there are any plans to run-on, for example to enable surplus release and/or benefit improvements, the reserve needs to remains sufficient to cover the associated expenses.

We expect each scheme’s expense reserve to evolve over time as its long-term strategy develops. This means the reserve is likely to be adjusted at each valuation.

Please also read Annual funding statement 2025 to see further clarification points raised on the DB funding code.