Pensions: A UK-Wide Overview

How the Pension Schemes Bill Is Changing the Face of Pensions Legislation in the UK

For the past 30 years, the main focus of pensions legislation in the UK has been the security of benefits and increasing private pension coverage. However, in a roadmap published alongside the recent Pension Schemes Bill, the UK government says: “The task for the second half of the 2020s is to build not just savings pots but a pensions system [that] delivers the very best it can for savers and for the economy as a whole.” This suggests fundamental changes may be on the horizon and, certainly, the Pension Schemes Bill demonstrates a marked shift in emphasis from previous legislation ‒ with a focus on investment and scale as opposed to protecting members. However, how fundamental any changes will be remains to be seen.

Impact on DB pension market

Looking at the provisions in the Pension Schemes Bill, one that has captured a lot of attention is the relaxation of the rules on refunding ongoing defined benefit (DB) surplus. Consultation suggested this could “support schemes to invest in productive asset allocations”, as it would remove some concerns around resulting surplus being trapped. Trustees will be able to amend scheme rules by resolution to permit refunds and will no longer have to be satisfied it is in members’ interests. In addition, the required funding threshold is likely to be reduced from buyout to low dependency.  

However, just because trustees can do something does not mean that they should. One major hurdle to any surplus refund will be difficulties in determining scheme liabilities, particularly given issues around the validity of past deeds of amendment following court decisions on the interpretation of amendment powers and contracting-out requirements. It seems that the UK government is alive to this and provisions will be included in the Pension Schemes Bill to deal with issues arising from the Virgin Media decision. The Pension Schemes Bill will allow trustees to seek retrospective actuarial confirmation that amendments did not prevent a scheme from meeting relevant contracting-out requirements.

The other development that will affect DB schemes is a statutory framework for DB superfunds, which may pave the way for more transfers to them. This will replace the interim regime set up by the Pensions Regulator and ‒ although similar ‒ will have some differences. Notably, even though trustees of transferring schemes will still have to show they are currently unable to access buyout, they will not need to demonstrate that there is no reasonable prospect of them doing so in the foreseeable future. The new regime will also explicitly allow for “permitted profit extraction” from a superfund’s capital buffer in certain circumstances, so there will be scope for new models that are based on run-on rather than a bridge to buyout.    

Impact on DC pension market

On the defined contribution (DC) side, there are also moves towards fewer larger schemes, which provide greater value for members. The Pension Schemes Bill will require master trusts and group personal pension schemes (GPPs) used for auto-enrolment to have a main scale default fund of GBP25 billion by 2030 (subject to exceptions and transitional provisions and provisions for new entrants to the market). These schemes will need to apply for regulatory approval in relation to their main scale default funds and may also need to meet criteria in relation to asset allocation. The details will be set out in regulations but could require a percentage of assets to be in UK investments or private equity. The UK government “does not anticipate exercising [this] power unless it considers that the industry has not delivered the change on its own” but it is difficult to see how any quantitative investment requirements would fit comfortably with a fiduciary duty to invest scheme assets in the best financial interests of members.

The value for money provisions in the Pensions Scheme Bill are also likely to lead to increased consolidation within the DC market. The intention is that a new framework will set out a standardised test for DC schemes to demonstrate that they deliver value. If they do not, they will need to consider transferring members to a scheme that does. The Financial Conduct Authority (FCA) has consulted on what this test would look like in the personal pension space and regulations will set out the detail for occupational pension schemes. Schemes are likely to be required to carry out and publish detailed assessments that include information about a variety of metrics such as service, investment performance, asset classes, and costs and charges, as well as assessing value in comparison with other schemes, including some with assets exceeding GBP10 billion.

To facilitate consolidation and change in the personal pensions space, GPP providers will be able to make amendments, transfers and changes to investments without member consent. This will be subject to conditions, including a requirement that any change is in members’ interests.

The Pension Schemes Bill does not address the adequacy of retirement incomes. This will be looked at by the new Pensions Commission, due to report in 2027, which will “examine why tomorrow’s pensioners are on track to be poorer than today’s and make recommendations for change”. However, the Pension Schemes Bill does contain some measures aimed at improving outcomes for DC members ‒ notably, around options at retirement. Trustees will need to offer members a “default pension benefit solution” that provides a regular income in retirement and takes into account their needs and circumstances. The UK government continues to work on the possibility of using collective DC schemes as a decumulation option.  

Another feature of the Pension Schemes Bill that might improve member outcomes is the proposed consolidation of small DC pots (pots of GBP1,000 or less within the auto-enrolment regime where there have been no contributions or investment decisions for 12 months). Schemes will be required to transfer such pots to a commercial consolidator and communicate with members. Auto-enrolment has led to a proliferation of such pots and the costs to the industry of administering them are significant, so this should result in savings for many schemes.

Outlook

Finally, it is worth noting that the pensions tax regime continues to evolve. Draft legislation has been issued that will impose an inheritance liability on used DC pots and lump sums payable on a member’s death (other than on death in service) from 2027. It is also possible that we may see something in the budget on pensions tax relief, as the government looks for alternative ways to raise money.

2025‒26 looks set to be an interesting year in pensions!