PENSIONS: An Introduction

Building on some of its predecessor’s initiatives, the new government’s pension plans are beginning to take shape, including the announcement of a new Pension Schemes Bill. This is expected to address greater scheme consolidation, value and outcomes for members, as well as making changes to enable schemes to invest in a broader range of assets to help drive wider economic growth. But the Bill’s timing is currently unclear, as is the fate of certain pensions proposals which were in progress before the UK general election.

What’s the story with value for money?

Over the last few years, the Department for Work and Pensions (DWP), the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR) have been working in tandem to establish a common framework for assessing “value for money” (VFM) across the entire defined contribution (DC) market. With the goal of delivering better retirement outcomes, the new framework will provide a transparent and standardised process for those in scope to assess and compare the value their scheme offers against real market comparators.

Under proposals consulted on by the FCA, the outcome of a scheme’s assessment will need to be publicly disclosed, using a traffic light ratings system. A “green” rating will be reserved for DC schemes offering VFM, “amber” indicates that an arrangement “can be improved within a reasonable period of time such that it offers VFM”, and “red” is intended to mean that a scheme “cannot or will not be improved within a reasonable period of time”. Unsurprisingly, amber or red-rated arrangements will be expected to take steps to address poor value so as to lessen the gap between them and the market average.

Small DC pots, I heard you say…

The advent of automatic enrolment in 2012, coupled with a much more mobile UK workforce, has resulted in successive governments expressing concerns about the dangers of pensions savers amassing numerous small DC pots over their working lifetime.

With several options considered over the years, following a 2024 DWP consultation, proposals to introduce a select few default consolidators look likely to make it over the legislative finishing line. This would allow DC pots of up to GBP1,000 to be consolidated, with a “clearing house” acting as a central point to store and manage data and inform schemes where to transfer.

Another option is for individuals to have a DC “pot for life” via a single “lifetime provider”. This model is not without its difficulties though, including the additional costs, administrative burden and potential liability associated with employers having to pay pension contributions into multiple schemes.

That is why they call it the scheme funding and investment strategy

Many years in the making, a new funding regime applies to all actuarial valuations with effective dates on or after 22 September 2024. All defined benefit (DB) schemes will have to produce a funding and investment strategy setting out how trustees:

• envisage benefits being delivered over the long term; and
• plan to transition from the scheme’s current funding position to low-dependency funding (ie, minimal reliance on the sponsoring employer’s covenant) by the time the scheme is “significantly mature”.

During this transition, risk must be supportable by the employer covenant and the DB scheme’s maturity.

Once trustees have determined or revised their funding and investment strategy, they must capture certain details in writing. This is a statement of two halves, with part one being the strategy itself and part two covering other key information, including:

• the trustees’ assessment of how successfully the strategy is being implemented and the key implementation risks;
• information about the current investment strategy; and
• the trustees’ assessment of the sponsoring employer’s covenant and the evidence on which it is based.

Trustees must obtain the sponsoring employer’s agreement to part one of the statement, but only need to consult when preparing or revising part two. The statement must be signed by the DB scheme’s chair of trustees and submitted to TPR as soon as reasonably practicable.

Whilst already in force, key pieces of the new funding regime have yet to slot into place. This includes updated covenant guidance and final guidance outlining TPR’s regulatory approach.

Are DB surplus options still standing?

Having been popular in the 1990s, until recently, scheme surpluses seemed confined to the pages of the DB history books. Following a recent revival, a 2024 DWP consultation considered options for using surpluses, as well as other DB changes. Possibilities on the table included:

• introducing a statutory override to enable all DB schemes to share surplus, subject to appropriate funding levels and other key safeguards;
• allowing one-off payments to be made to members out of surplus, which might otherwise be blocked by the pensions tax rules;
• creating a permanent legislative regime for superfund consolidators, with such schemes currently governed by an interim TPR authorisation regime; and
• plans to establish a public sector DB consolidator by 2026, to be run by the Pension Protection Fund (whose current role is to act as a pensions lifeboat when DB scheme sponsors become insolvent). This consolidator would be aimed at schemes unattractive to commercial endgame providers.

With some proposals still at an early stage, it is unclear which of the above will eventually make the final cut, and which might simply be snuffed out.

How wonderful pensions life will be, with dashboards in the world

In future, individuals will be able to access their UK pensions information, including about their state pension, via a single online portal. To make this happen, trustees of schemes in scope must connect to the “dashboards ecosystem” and ensure their scheme can receive and deal with both “find” and “view” requests. Whilst technically there is a longstop statutory deadline for connecting of 31 October 2026, in reality schemes are expected to connect much sooner, according to a timetable set out in DWP guidance.

With the largest occupational pension schemes due to onboard at specified points between 30 April and 30 November 2025, pension schemes need to start getting dashboards ready.

Never, ever, getting the LTA back together?

Prior to 6 April 2024, the lifetime allowance (LTA) limited the total amount of tax-relieved pension savings that an individual could build up over their lifetime across all their pension schemes registered with HMRC, without incurring an additional tax charge. Any excess above the LTA was previously taxed at 55% (if taken as a lump sum) or 25% (if taken as pension), although this was changed to marginal rate tax in the LTA’s final year of existence.

2024 saw a major pensions tax overhaul, with the LTA abolished at the relatively tender age of 18. Although a new system of lump sum allowances is still being bedded down, with a new Chancellor at the helm and Treasury coffers reportedly somewhat depleted, the big question is whether further pensions tax changes will be shaken off in 2025.