THE BOTTOM LINE
- Pension Liabilities Will Adjust: This order directly impacts the valuation of liabilities for companies with defined benefit (final salary) pension schemes. The newly published percentages will be a key input for actuaries calculating scheme funding levels.
- Mandatory for 2026 Retirees: Pension scheme administrators must use these statutory rates to calculate the benefits for former employees (deferred members) who reach their normal pension age in 2026, affecting cash flow planning for scheme payouts.
- Compliance Checkpoint: This is a routine but mandatory legal update. In-house legal and finance teams should ensure their pension administrators have acknowledged and implemented these new rates to remain compliant with UK pensions law.
THE DETAILS
Each year, the government issues a crucial piece of secondary legislation that, while procedural, has a significant financial impact on businesses operating legacy final salary pension schemes. The latest iteration, The Occupational Pensions (Revaluation) Order 2025, sets the official percentages used to increase the value of pension benefits for former employees between the time they left the company and their retirement. This process, known as revaluation, is a statutory requirement designed to protect the purchasing power of deferred pensions against inflation. This order applies to members who will reach their scheme’s normal pension age during 2026.
The legal mechanism stems from the Pension Schemes Act 1993, which mandates this annual adjustment. The Order provides a detailed table of percentages based on the period in which an employee’s benefits were accrued. For instance, for the revaluation period from 1st January 2025 to 31st December 2025, the Order specifies a “higher” revaluation percentage of 3.8% and a “lower” percentage of 2.5%. The specific rate applied depends on the scheme’s own rules, but the core function is to provide a state-mandated uplift to the value of the accrued pension, ensuring it keeps pace with economic changes.
While the government’s explanatory note correctly states that the administrative impact of this annual update is negligible—it’s an expected, formula-driven change—the financial impact is anything but. For CEOs and finance directors, these percentages are a direct factor in the long-term cost of pension promises made years or decades ago. The figures in this Order feed directly into actuarial valuations, influencing balance sheet liabilities and the company’s funding strategy for its pension scheme. It serves as an essential annual reminder for senior leadership of the ongoing financial commitments associated with defined benefit pensions.
SOURCE
UK Statutory Instruments
