Ofgem proposed on Friday to leave pension allowances for energy network companies broadly unchanged overall, with eleven schemes now in surplus compared with five in 2023.
The regulator said it reviews the pension allowances that RIIO network companies can recover through regulated revenues every three years, and that these are “ultimately funded by consumers through their energy bills”.
Its provisional conclusions from the 2026 review say funding positions have generally improved since the previous review. The proposed allowances would give an overall net recovery position broadly consistent with the one set after the 2023 review.
According to the regulator’s draft notice, network operators have a defined benefit pension obligation of £25.6 billion against £26.1 billion in assets, a surplus of £0.5 billion. The figures use a nominal price base.
The proposed allowances mainly reflect the latest actuarial valuations, changes in scheme funding positions and the operation of the Pension Payment History adjustment. Most valuations are dated 31 March 2025, with four schemes valued as at 31 March 2024.
The Government Actuary’s Department carried out a high-level review of the methods and assumptions used in the 2024 and 2025 valuations, and of the evidence companies gave on how they weigh consumer interests in scheme governance. It reported “no major concerns”.
Ofgem proposes no changes to the base Pension Scheme Established Deficit values and Pension Payment History figures that the operators submitted. It also does not consider that an adjustment factor should apply to any operator’s allowance.
Two schemes have changed status since the 2023 review. The Scotia Gas Networks and Cadent Gas schemes have closed to future accrual, joining the Wales & West Utilities scheme, which was already closed.
The NGN scheme was left out of the review because of its anticipated close-out.
Ofgem said improved funding means the management of surpluses is “becoming increasingly important”. It set out seven provisional recommendations for operators to adopt before the next review in 2029, covering surplus management and consumer benefit, de-risking, recovery plans and future reporting.
Defined benefit funding remains uncertain, the regulator noted, because investment returns, inflation and life expectancy can produce either surpluses or deficits.
At the time of the 2023 decision, the companies received £334 million a year in pension allowances as part of their revenue. That review confirmed revised allowances and recommendations ahead of the 2026 exercise.
The provisional allowance values are set out by price control. Electricity distribution figures for RIIO-ED2 and ED3 are in 2020 to 2021 prices, while those for RIIO-ET3, RIIO-GT3 and RIIO-GD3 are in 2018 to 2019 prices.
The summary comparison with the previous review uses 2023 to 2024 prices, the price base of the current RIIO-3 price control.
Network companies, pension scheme trustees, consumers and their representatives can respond. Ofgem asked that responses identify any factual or calculation errors in the provisional values.
Views are due by 13 November 2026. Ofgem then expects to publish its final decision, the revised allowance values and the Government Actuary’s Department’s final report, with the revised allowances expected to take effect from 1 April 2027.