The Pensions Regulator’s (TPR) Annual Funding Statement 2026 (the AFS) reflects the continuing improvements in defined benefit (DB) scheme funding with figures at 31 December 2025 showing that 90% of schemes were in technical provisions (TPs) surplus, 80% in low dependency surplus and 60% in buy out surplus.
Against this backdrop, TPR’s core messaging focuses on the continuing importance of employer covenant in the valuation process and that, for many schemes with improved funding, trustees should be prioritising ‘long-term endgame planning’ rather than deficit recovery.
The AFS is relevant to all DB schemes but is particularly directed at the 2026/27 valuation tranche (with effective valuation dates between 22 September 2025 and 21 September 2026) and to trustees reviewing their funding and investment strategies under the new funding regime.
“While the overall picture is positive, trustees should remain alert to wider economic and geopolitical uncertainty. Understanding the risks to investment strategies and employer covenants remains essential, particularly as schemes move closer to their long-term objectives.” [Source: TPR 06.05.26 press release]
Funding strategies – guidance based on three different groups of schemes
TPR has retained the same three groupings as in the 2025 AFS, but with two sub-groups for Group 1. Much of the messaging tracks that from last year with updates where appropriate.
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Group 1A: Funding level well above low dependency (110% or more funded) – focus on completing and realising endgame
The focus for Group 1A schemes should be on completing and executing their endgame. For schemes targeting buy out, this will typically involve ‘locking down investments’ to reduce funding instability. Schemes planning to run on may adopt more risk – they should ‘consider’ their surplus policy and the extent to which they depend on the employer covenant to support risk.
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Group 1B: Funding level at or just above low dependency (100% to 110% funded) – focus on endgame planning
Group 1B schemes may not have as many choices as Group 1A. They may have to accept a modest element of investment risk to shore up funding to reach the LTO. Trustees should determine how much the scheme relies on the covenant to support risk.
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Group 2: Funding level above TPs but below low dependency funding target – focus on low dependency
Keep the scheme on track to reach low dependency by the relevant date with adequate oversight and control of downside risks.
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Group 3: Funding level below TPs – focus on deficit recovery
Concentrate on eliminating the deficit as soon as the employer can reasonably afford. TPs should be in line with the journey plan to low dependency with risk reflective of covenant support and scheme maturity.
General considerations
The AFS also reinforces several wider expectations that apply across all funding groups. Many of the themes have been carried over from the 2025 AFS, with adjustments to reflect developments since then.
- Covenant: Covenant remains fundamental to determining supportable risk, with more emphasis on ongoing monitoring and downside protection as funding improves. Nevertheless, there remains a place for more detailed assessments, for example, where funding is weaker, the scheme is large compared to the employer or risk levels are high.
- Cyber incidents: The increasing prevalence of cyber incidents highlights the need for trustees to proportionately monitor risks both to the employer and the scheme.
- Continued macroeconomic uncertainty: Trustees should ensure the scheme can meet short-term liquidity and cashflow needs in the current climate of continued macroeconomic uncertainty. This uncertainty also requires effective management of potential volatility within the long term investment strategy and that the strategy is sufficiently resilient to economic movements. Where there is a risk of a material impact on employer cash flows and prospects, trustees should reassess whether current risk levels are appropriate and, if need be, adjust the scheme’s journey plan.
- Operational processes: Operational resilience remains important – processes should be ‘robust and effective’ enough to withstand market shocks and support the level of risk being run.
- ESG: Trustees should also continue adviser and employer liaison on climate change and wider sustainability matters.
- Scheme return from 2027: TPR will be making changes to the scheme return next year to reflect the revised funding code and SoS.
Clarification on common valuation queries – the appendices
The AFS appendices provide technical clarification on areas where TPR has received frequent queries as the new regime has bedded in. Key points are set out below.
Appendix 1: employer covenant
TPR notes that a restricted covenant which prevents adherence to supportable risk principles should be rated as inadequate in the SoS. This will not usually prompt regulatory intervention. TPR engagement is more likely where the employer covenant is assessed as adequate, but other factors do not support this conclusion.
TPR would like to receive information on all contingent assets in the SoS, not just those used to support funding and investment strategy (FIS) risk. It also confirms that non-look through guarantees can still be valued in the SoS using TPR guidance to do so.
Appendix 2: supportable risk
TPR clarifies the treatment of surplus and asset backed contributions when determining supportable risk as well as noting the need for consistency between the risk measure used for investment risk and supportable risk assessments in the calculation of a stress event (which should reflect the whole period of the supportable risk assessment up to the scheme’s reliability period unless the assessment period is only a year).
Appendix 3: clarifying the low dependency funding basis (LDFB) and low dependency investment allocation (LDIA)
The LDIA is a notional benchmark representing how the assets backing low-dependency liabilities would be invested, not the scheme’s actual investment strategy.
TPR clarifies important aspects of the LDFB and the LDIA including the interaction between the LDIA and the high resilience test calculation that should only consider the LDFB liability notional assets and which should assume full low dependency funding. TPR explains that it might not be necessary to adjust the LDIA if the high resilience test is not met if it is compliant with statutory requirements. However, trustees should identify the reasons for failure and whether it would be appropriate to change the LDIA strategy.
TPR notes that schemes which have already passed their relevant date have fewer funding and risk options than those that have not. Such schemes should address any low dependency deficit primarily through additional employer contributions and/ or contingent support, rather than by increasing investment risk.
Finally, TPR refers to the need for the FIS to include sufficient liquidity to withstand economic and market volatility and how the expense reserve that has to be included in low dependency liabilities where the employer does not meet expenses should reflect the long-term strategy of the scheme.
Next steps
Trustees of T26/27 schemes, or those reviewing the FIS, should consider whether their current funding and investment plans have the right strategic focus in line with TPR’s scheme groupings. For many, improved funding positions create an opportunity to use the valuation process to focus more directly on endgame planning, while all schemes can use it to assess whether they remain on track to meet the LTO.
In due course trustees will also have to factor in any adjustments that TPR makes to its regulatory approach and valuation assessment and any changes that TPR decides to make to Fast Track parameters in response to market conditions. It will also be interesting to see what TPR has to say in its forthcoming statement of surplus that is expected to be issued alongside a DWP consultation on surplus regulations.