HL UK Pensions Law Digest 8 May 2026

Welcome to our latest update, in which we cover:

National Insurance Contributions (Employer Pensions Contributions) Act 2026

• As expected, the legislation to apply National Insurance contributions (NICs) to contributions made by salary sacrifice has received Royal Assent;

Pensions Regulator (TPR): annual funding statement

• TPR outlines its approach for schemes with valuation dates from 22 September 2025 to 21 September 2026;

Pensions Regulator (TPR): final-form code of practice for collective defined contribution schemes

• TPR has published its final-form code of practice on collective defined contribution schemes (CDC), together with a consultation response and an explanatory memorandum;

Pensions Dashboards Programme (PDP): blog to mark six months until connection deadline

• PDP has published a blog covering key issues in advance of the connection deadline of 31 October 2026;

Funded reinsurance: Prudential Regulation Authority (PRA) consultation and speech

• The PRA’s proposals to address concerns about increased use of funded reinsurance in the bulk purchase annuity (BPA) market.

National Insurance Contributions (Employer Pensions Contributions) Act 2026 

The National Insurance Contributions (Employer Pensions Contributions) Act 2026 has received Royal Assent. The Act will cause employee pension contributions above £2,000 per year made by salary sacrifice to be subject to employer and employee National Insurance contributions (NICs). 

The change will have effect from 6 April 2029.

For a reminder of the government's policy intentions for salary sacrifice and pension contributions, please see our Digest of 26 November 2026.

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Pensions Regulator: annual funding statement 2026

The Pensions Regulator (TPR) has issued its annual funding statement for schemes in Tranche 25/26 (with valuation dates between 22 September 2025 and 21 September 2026). TPR comments that the statement is also relevant to all defined benefit (DB) schemes. Key points are as follows.

Funding levels and focus

TPR estimates that as at 31 December 2025:

• 90% of DB schemes were in surplus on a technical provisions (TP) basis;
• 80% of schemes were in surplus on a low dependency basis, with 60% at least 110% funded on this basis;
• 60% of schemes were in surplus on a buy-out basis; and
• About 10% of schemes were in deficit.

TPR expects the focus of most schemes in Tranche 25/26 to shift from deficit recovery to endgame planning, with valuations increasingly becoming a strategic tool for assessing progress against long-term objectives.

TPR estimates that around 80% of schemes would meet the criteria for its Fast Track approach to funding. TPR is not making any changes to its Fast Track parameters for Tranche 25/26.

Use of surplus

• TPR notes the provisions relating to surplus release in the Pension Schemes Act 2026 and that details will be contained in regulations, expected to come into force in 2027.
• TPR intends to publish early views on factors trustees should take into account when considering surplus release, at around the same time as consultation on the draft regulations.
• TPR will consult on more detailed surplus guidance later in 2026.
• Appendix 2 to the annual funding statement sets out TPR’s views on how surplus should be treated when assessing supportable risk.

Funding categories

As in earlier years, TPR has grouped schemes into funding categories.

Group 1A: at least 110% funded on low dependency basis

• Focus should be on finalising and implementing the scheme’s endgame.
• Trustees of schemes running on should: determine the degree of reliance on the employer covenant needed to support any investment risk; and consider their policy on surplus.

Group 1B: 100-110% funded on low dependency basis

• Focus should be on endgame planning.
• Some investment risk may be taken to bring the funding position to the level required for the intended endgame.
• Trustees should monitor the employer covenant proportionately, to the extent it is relied on to support investment risk.

Group 2: funding level above TPs but below low dependency

• Focus should be on maintaining progress towards reaching low dependency by the scheme’s relevant date.

Group 3: in deficit on TP basis

• Focus should be on addressing the deficit.
• Trustees should align the TPs with the scheme’s journey plan to reaching low dependency.
• Risk should reflect the employer covenant and the deficit should be recovered as quickly as the employer can reasonably afford.

Employer covenant

• Trustees’ monitoring of employer covenant should include the potential impact of cyber incidents; climate change and wider sustainability issues; and macroeconomic uncertainty.
• Where covenant strength is inadequate, trustees should acknowledge this in their statement of strategy. TPR comments that an “inadequate” covenant alone would not usually trigger regulatory engagement. TPR is more likely to investigate where trustees have assessed the covenant as “adequate” but circumstances suggest this may not be warranted.
• Trustees may choose to report all contingent assets available to the scheme, not just those relied on to support risk in the funding and investment strategy.
• Trustees may also choose to ascribe value in their statement of strategy to guarantees which do not meet the criteria for being “look-through guarantees”.

Low dependency funding basis (LDFB) and low dependency investment allocation (LDIA)

Appendix 3 to the annual funding statement clarifies some aspects of the LDFB and LDIA requirements.

• In the statement of strategy, trustees may choose whether to report their intended allocation to growth and matching assets at the scheme’s relevant date for all scheme assets, or only for the assets notionally held in respect of LDFB liabilities.
• However, only assets notionally held in respect of LDFB liabilities should be used for the high resilience test calculation.
• Schemes which have a deficit on the LDFB after their relevant date should seek to repair the deficit primarily through additional contributions or contingent support, and not by increasing investment risk.
• Unless expenses are payable by the employer, a scheme’s low-dependency liabilities should include a reserve for the discounted value of expected non-investment expenses from the relevant date.

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The Pensions Regulator publishes a revised code of practice on collective defined contribution schemes

On 29 April, the Pensions Regulator's (TPR's) updated code of practice on the authorisation and supervision of collective defined contribution (CDC) schemes, together with an explanatory memorandum, were laid before Parliament.

The existing code covers single and connected employer CDC schemes. The new revised code has been extended to cover the authorisation and supervision of unconnected multi-employer CDC schemes. It sets out TPR's expectations of CDC schemes, the criteria for their authorisation, and how TPR will use its powers in this market.

TPR had previously consulted on a revised code in December 2025, summarised in our Digest of 8 January. The consultation response was published alongside the final-form code. TPR has made some limited changes to the code in response to the consultation. These include improvements to the clarity of content and signposting, and minor amendments to clarify TPR's expectations on not-for-profit schemes.  

TPR has identified several areas where further guidance would be helpful, including on the calculation of fees, promotion/marketing and the assessment of IT systems. TPR aims to publish any additional guidance before the summer.

The code does not cover retirement-only CDC schemes, but TPR states that it will update the code when the government takes measures to introduce them.

The explanatory memorandum to the code of practice sets out the policy, legislative and regulatory context. It also includes a brief summary of the consultation process and outcome, and a high-level impact assessment.

The code of practice is expected to come into force in mid-October.

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The Pensions Dashboards Programme publishes a blog covering key issues in advance of connection deadline 

The Pensions Dashboards Programme (PDP) has published a blog: Pensions dashboards connection deadline: your questions answered, to mark six months until the final connection deadline for pensions dashboards (31 October 2026). By this date, all pension providers and schemes in scope of the legislation must have completed connection to the pensions dashboards ecosystem.

The blog provides links to a range of useful resources, including source legislation, regulatory guidance and PDP's own materials on data preparation and the connection process via its connection hub.   

The blog urges trustees and scheme managers to review their connection plans, confirm their approach and take any remaining steps to ensure that connection is completed by 31 October 2026.  

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Funded reinsurance: Prudential Regulation Authority consultation and speech

The Prudential Regulation Authority (PRA) has issued a consultation on funded reinsurance (CP8/26) and a speech on innovation and resilience in the bulk annuity purchase (BPA) sector by Gareth Truran, Executive Director, Insurance Supervision. The speech and consultation highlight the PRA’s concerns about the increasing exposure of the UK life insurance market to funded reinsurance and set out its proposals for change.

Points to note include the following.

• BPA pricing reached historically low levels in 2025. Competitive pressure increases the possibility of insurers taking on higher levels of risk or assuming higher investment returns.
• The current regulatory treatment of funded reinsurance does not appropriately reflect the underlying risks and is not aligned with the treatment of economically similar assets. Under UK Solvency II, there are material differences in the treatment of risks associated with reinsurance, compared to risks arising from assets held directly in annuity portfolios.
• The PRA considers that the regulatory misalignment in the treatment of risks can incentivise insurers to rely “excessively” on funded reinsurance to support their BPA business. This can lead insurers to accumulate concentrated exposures in complex reinsurance structures and results in competitive distortions in the BPA market.
• The PRA proposes changing the valuation of funded reinsurance arrangements on insurers’ UK Solvency II balance sheets to better reflect expected losses if the counterparty defaults. This will be achieved by tightening requirements for the calculation of the “counterparty default adjustment” (CDA) applicable to funded reinsurance, through use of a prescribed rating methodology.
• The changes will apply to insurers’ calculations from 1 July 2027. Existing reinsurance arrangements, and arrangements under which all risks covered are fully transferred to a reinsurer on or before 30 September 2026, will be exempt. The PRA expects the volume of new funded reinsurance arrangements transacted before 30 September 2026 to be consistent with insurers’ existing plans.
• The PRA anticipates that the changes will lead to decreased use of funded reinsurance and an increase in direct investments, including in UK productive assets.
• The PRA notes that concerns about the growth of cross-border funded reinsurance have also been identified by international institutions, such as the International Association of Insurance Supervisors (IAIS) and the International Monetary Fund (IMF). Regulators in the Netherlands and the USA have already tightened requirements for use of funded reinsurance.
• Consultation closes on 31 July 2026.

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Authored by Jill Clucas and Susanne Wilkins.