Who doesn’t love a good fairground ride? The Pension Schemes Bill certainly caters for every taste. It covers a wide variety of provisions, from thrill-seeking measures intended to capitalise on the vast amount that is saved in UK pension funds, through to measures likely to appeal to a more sedate nature, such as amendments to legislation that doesn’t quite work in the current economic and political climate.
In a September 2024 report by the Pensions Policy Institute (PPI), the PPI estimated that the assets of the UK pension sector ‘towards the end of 2023’ were valued at just under £3 trillion, with defined benefit (DB) representing 55% and defined contribution (DC) having topped £1 trillion towards the end of 2023. It is worth noting that of that £3 trillion, workplace pensions account for over £2 trillion in assets. It is no small wonder then that this has been the focus of the chancellor’s pensions reform.
So far as growing the economy is concerned, the chancellor has adopted the approach of juggling three balls in the air at the same time. These are: (1) the introduction of measures to scale up DC pension funds so that they are in a better position to invest in a broad range of assets, including illiquid assets such as infrastructure and the UK’s private markets, (2) implementation of a framework for DB commercial consolidators, to facilitate scale in the DB sector, and (3) the introduction of measures to facilitate the release of pension fund surpluses in DB schemes back to employers and pension scheme members, with the intention that this then flows back into the UK economy.
The bill is divided into four key parts.
1. DB Measures
LGPS
The LGPS measures broadly follow the outcome of consultation on the LGPS: fit for the future, but also contain a surprise measure that would allow the government to direct pools to comply with statutory guidance or to exercise their investment management activities in a particular way.
Surplus Release
The bill amends the Pensions Act 1995 by introducing a power for trustees of DB pension schemes to modify their scheme rules to allow release of surplus. There will be no statutory override that would allow trustees to simply make surplus payments regardless of the scheme rules. The discretion as to whether a refund of surplus is made will rest with the pension trustees. The bill makes consequential amendments to facilitate the new power, such as repealing Section 251 of the Pensions Act 2004 (which included the requirement that trustees must have passed a resolution before 6 April 2016 to preserve any power in their rules allowing a refund of surplus to the employer). Section 37 of the Pensions Act 1995 is also amended to insert new conditions for making a refund of surplus, and to exclude the requirement that the refund of surplus must be “in the interests of members”. The meaning of “in the interests of members” had generated some legal debate as to whether it placed an onus on trustees that was greater than acting in accordance with their usual fiduciary duties.
2. DC measures
- The bill contains the long-discussed value for money framework.
- Measures are included in the bill relating to the consolidation of small DC pots that have a value of less than £1,000, where no contributions have been made in the last 12 months and where the member does not opt out of consolidation.
- The bill also contains the framework for a requirement to scale up the asset size of DC master trusts and GPPs to £25 billion by 2030. This is achieved by inserting into automatic enrolment (AE) legislation new conditions for approval as an AE scheme by The Pensions Regulator (TPR) or the Financial Conduct Authority (FCA) as appropriate. There will be an easement, referred to as “transition pathway relief” in the bill, for those with at least £10 billion in assets under management in their main scale default arrangement by 2030, if acceptable plans are offered to the relevant regulator to scale up by 2035. By virtue of the definition of master trust, group-wide schemes are exempt from the requirement, and there is a specific exemption for default funds that serve protected characteristics, such as religion.
Interestingly, one of the new conditions for meeting the AE quality requirement is that master trusts and GPPs must comply with an “asset allocation requirement” or apply for exemption. Examples given in the bill of the types of assets that might be caught by this asset allocation requirement are private equity, private debt, venture capital, and interests in land. This requirement seems to go further than the government simply taking a reserve power in the legislation to mandate future asset allocation targets. It will be one to watch to see how this is expected to work in practice.
Two other notable measures are included in the asset allocation requirement provisions. First, before any regulations are made in relation to the asset allocation requirement, the Secretary for State (DWP) must consult the Treasury. Second, the asset allocation requirement provisions will override any provision of the trust deed or rules of a scheme, so far as they are in conflict. Note, however, that the asset allocation requirement does not override the fiduciary duties of trustees and providers. If there is a conflict between the two, trustees and providers will have to find a way to manage that conflict.
- The DC measures include the introduction of default pension benefit solution requirements for occupational DC schemes.
3. DB Superfunds
The DB superfund measures introduce a legislative framework for commercial consolidators. The framework, along with supplementary regulations and guidance, is expected to be in place by 2028. This has been a long time in the making and will be of interest to those operating schemes that have funding levels insufficient to achieve buyout with an insurer, but where the sponsor wants to reduce their pension liabilities. Theresa May’s government first consulted on legislation for superfunds in 2018, but it was put on the back burner, with TPR having to introduce its own guidance for authorisation in the interim.
4. Miscellaneous Measures
- The Pensions Ombudsman (TPO)
Section 91(6) of the Pensions Act 1995 sets outs a requirement that where there is any dispute as to the amount to be recouped following the overpayment of pension, the trustees must obtain an enforcement order from a “competent court”. Recent case law decided that TPO does not constitute a “competent court” for these purposes. The Pension Schemes Bill contains an amendment to section 91(6), with the effect that if the trustees have a TPO determination in their favour, they will no longer need to also seek a county court enforcement order before off-setting future pension payments from a member’s pension.
- The Pension Protection Fund (PPF)
The bill removes restrictions that prevent the PPF (in practice) from reducing the annual pension protection levy it collects, when the levy is not required. The PPF has said that it will take a final decision on the calculation of the 2025-2026 levy in line with the new provision in due course, and that it does not plan to proceed with invoicing until it has concluded its decision-making. The PPF expects to provide a further update by the end of July.
Dodgems or Bumper Cars – What to Watch out For
Whether you think the new measures are ones to be dodged, or met head on, nothing is going to happen quickly (other than perhaps the LGPS reforms), and there is always the possibility that some measures may never be brought into force. As well as the long transit through Parliament, the government’s roadmap contains long indicative lead in times, with many provisions not expected to come into force until 2028, assuming that the bill receives royal assent and becomes an Act of Parliament sometime in 2026.
There is form, too, for not all pension measures being implemented. When the Pension Schemes Act 2021 received royal assent in February 2021, the new powers for TPR included the framework for an enhanced notifiable events regime. That would have seen corporates being required to notify TPR and pension trustees of DB schemes in advance of a corporate acquisition, before it completed, regardless of how that disclosure might interact with other requirements, such as the listing rules. The DWP consulted on draft regulations for implementing the new notifiable events regime, but they were never finalised, and seem to have been put on the too difficult pile, for now anyway.
DB funding has been a bit of a roller coaster of highs and lows over the last 20 years. However, in its latest annual funding statement, TPR estimated that as at 31 December 2024, around 54% of DB schemes were in surplus on the buyout basis, and that 76% of DB schemes were in surplus on the new low dependency basis. (Broadly, this means a basis where the scheme has a low (not “no”) dependency on the sponsoring company.) It is the new low dependency basis of measuring a pension scheme deficit that the government has said it is minded to target when it introduces regulations that will provide the detail around the surplus refund measures in the Pension Schemes Bill. This may give corporates more comfort that any excess funding could potentially be extracted if the trustees exercise their discretion, and subject to conditions being met.
The superfund legislation includes penalties reflecting TPR’s powers to issue financial penalties of up to £1 million for breaches, along with certain breaches constituting a criminal offence. Anyone looking to transfer to a superfund should take advice to ensure compliance with the legislation once it comes into force – expected to be some time in 2028.
The PPF levy estimate for the 2025-2026 levy year might be reduced to zero! Watch out for a further statement from the PPF in July, once it has had an opportunity to consider the draft legislation in detail.
Final Thoughts
In another era (the early 2010s) the idea that monies saved into trust-based pension funds should be invested in a way that was not cautious and overly prudent, would have set off flashing alarms and bright lights at TPR. Any attempt by a small scheme, in particular, to make long-term investments in infrastructure, for example, rather than listed equities or gilts, might have come in for extra scrutiny.
Roll up, roll up and fast forward a few years, and while smaller schemes will no doubt still encounter justifiable scrutiny from TPR were they to suddenly invest all their funds in a rain forest in South America, it is the government itself that is encouraging innovative investment. Time will only tell whether the proposed scale, safeguards and framework will be sufficient to make such innovation successful.
