The Government has set out how it proposes to facilitate access to surpluses in defined benefit (DB) pension schemes and to create defined contribution (DC) ‘megafunds’. It has confirmed that the Pension Schemes Bill will not establish a Public Sector Consolidator for DB schemes.
Defined benefit proposals
The DB proposals are contained in the Government’s response to its predecessor’s February 2024 consultation Options for Defined Benefit Schemes. Changes requiring primary legislation will not be consulted on further and can be legislated for in the Pension Schemes Bill, which is expected soon.
Surpluses
Currently, there are three main obstacles to making payments to a sponsoring employer from a DB scheme that is not winding up: scheme rules must allow it; the scheme must remain fully funded on a buyout basis; and trustees must be satisfied that the payment is in members’ interests (a statutory requirement over and above their general fiduciary duties). The proposals address all three:
- The Bill will introduce “a statutory resolution power for trustees…to modify their scheme rules,” use of which will be at trustees’ discretion. The requirement to have passed a resolution to preserve a power to make payments to an employer will be repealed.
- The Government is “minded” to reduce the funding threshold to 100% on a low dependency basis rather than require full buyout funding. This is a bigger relaxation than the previous Government had envisaged: the 2024 consultation paper pointed to a margin above full funding on a low dependency basis. The Pensions Regulator estimates that the aggregate surplus at the end of September 2024 (amongst schemes in surplus) was £163bn on a low dependency basis, compared with £97bn on a buyout basis. This change can be made through regulations and will be subject to further consultation.
- The Government “will amend section 37 [of the Pensions Act 1995] to clarify that trustees must act in accordance with their overarching duties to scheme beneficiaries, which will remain unchanged”. This appears to mean that trustees can take account of the employer’s beneficial interest in the scheme as well as members’ interests, but this is not explicitly stated.
The consultation response records that many respondents had argued that it would encourage surplus-sharing if one-off payments to members were treated as authorised payments for tax purposes. No proposals are made but the Government is “continuing to consider the tax regime”.
The Government will not mandate how extracted surplus is used, but the response says that “the potential for members to benefit” is “vital to the success of this policy”. Regulatory guidance referencing “a suite of options” is promised.
The idea of schemes opting in to 100% Pension Protection Fund (PPF) coverage in exchange for a higher levy has been rejected.
Public sector consolidator
The previous Government had committed to launching a public sector consolidator (PSC), to be run by the PPF, by 2026 but had not taken decisions about eligibility or sources of reserving.
Today’s consultation response says that legislation to create a PSC will not be in the Pension Schemes Bill. Instead, the Government is “continuing to explore the best approach to establishing a consolidator that could complement the existing market”.
Any PSC would be a “small, focused” one. The Government believes that the case for creating a PSC is strongest in relation to underfunded schemes (with sponsors effectively paying deficit contributions after a transaction and remaining liable for their pension obligations until the deficit is removed), and that there is a “less clear” case for extending its remit to “small, well-funded schemes”. Further work is being done on the underwriting model and on benefit standardisation.
Defined contribution proposals
DC proposals are contained in the Final Report of the Pensions Investment Review and in the Government’s response to the Unlocking the UK Pensions Market for Growth consultation. In his forewords to these documents, the pensions minister says that he wants to add to the momentum for DC consolidation and enable “megafunds” to “go toe to toe for investment opportunities with the biggest international pension schemes”. Announcements include:
- Mandation powers: The Pension Schemes Bill will empower the Government to set “baseline targets for pension schemes to invest in a broader range of private assets, including in the UK. The Government “does not anticipate exercising this power unless it considers that the industry has not delivered the change on its own”. It maintains that any requirements introduced “will be consistent with the principles of fiduciary duty”.
- Adequacy review: The second stage of the pensions review will be launched “in the coming months”. The Government says that “systemic issues around adequacy currently mean millions are undersaving for retirement”.
- Size thresholds: Multi-employer DC schemes will in general be required to have £25bn in their main default arrangement by 2030, with requirements to be introduced via the Bill. Regulations will define the characteristics of “a main scale default arrangement” following consultation. There will be a pathway for schemes on course to have £10bn by 2030, enabling them to reach £25bn by 2035, and a glide path for new entrants to achieve scale. Collective Defined Contribution schemes will be exempt, at least initially.
- Fragmentation of defaults: There will not be a maximum number of default arrangements or funds per provider, but providers will be prohibited from establishing new default arrangements, except where these satisfy certain conditions and receive regulatory approval. The Government will not, at this stage, require that providers move to a single pricing structure regardless of employer characteristics.
- Employers and advisers: The Government is not currently taking forward proposals to put new duties on employers or regulate advisers but says “it is particularly important that, along with the schemes themselves, employers and advisers shift their focus to value”.
- Bulk transfers from contract-based schemes: The Bill will introduce contractual overrides to enable bulk transfers without consent from contract-based schemes, where an independent expert confirms that this is expected to improve outcomes for savers. The Government envisages that these would be initiated by providers and will often be internal transfers to better value funds (as opposed to being initiated by employers who have selected a new provider for new contributions).
- Asset allocation transparency: Ahead of asset allocation disclosures under the new Value for Money Framework (which will start to come through in 2028), the Pensions Regulator and Financial Conduct Authority will launch a data collection exercise later this year.
- 2029 review: In 2029, there will be a ministerial-led review to assess the impact of these measures and why smaller default funds continue to operate.
