A new Pension Schemes Act is imminent! What do you need to know?

GLYN BRADLEY: Thank you.

HOWARD JOHNSON: Glyn, for our listeners, could you introduce yourself, please?

GLYN BRADLEY: Yes, I'm Glyn Bradley, I'm a pensions actuary here at WTW. But unlike you, Howard, I focus on the technical and regulatory aspects.

HOWARD JOHNSON: And for those who've listened to our very first episode, which was just after the autumn budget had landed last year, you'll have recalled that Glyn was very excited about the budget. Has the pension schemes bill given you similar levels of excitement?

GLYN BRADLEY: Yeah, it is a really broad bill. It has been going on a long time, though. This has been going on since last summer, but part of my role is to follow the way that legislation has come through, and the way it's changed, and then trying to work out how we're going to implement that as it comes into force.

HOWARD JOHNSON: And the bill is closing in on its final stages now. Where exactly is it in the Parliament?

GLYN BRADLEY: It's nearly there. So most of it is agreed. But I think going on today in Parliament, there's a couple of clauses the politicians in the House of Lords and House of Commons are batting back between one another. And we're not quite there yet. But on most of the bill, the vast majority of it is now agreed. And we're expecting that to come in as an act around the end of this month, maybe possibly into May.

HOWARD JOHNSON: Yeah, so we're confident we can talk about the vast majority of what's in there. And there's a couple of areas of doubt. And we'll cover those as well. First of all, we'll talk through, I think, 9 or 10 key themes from the bill relating to, first of all, DB and then some DC related items. But would you like to talk to us about some of the main themes that underlie this bill?

GLYN BRADLEY: Yeah, 9 or 10 sounds a big number, but it is-- we're leaving a bit out there. It is a really wide-ranging bill, probably the most wide-ranging pensions bill since 2015 when we had pensions freedoms come in.

If you wanted to put to one unifying idea behind the bill, what the government is keen on is to have fewer pension pots and fewer schemes in bigger schemes, so that, the government thinks, more money will be going from those schemes, will be invested in the kind of illiquid UK assets that it's really keen schemes to put more money in.

HOWARD JOHNSON: Yeah, and the government, it's talked about how pension schemes should be a cornerstone of the UK economy. So you can see they're wanting to benefit the wider economy. And also there's a lot of talk in their documents around member outcomes as well and how, I guess it's a very fragmented industry at the moment. And I think the government's concerned that that might lead to some poorer outcomes in certain cases. So that consolidation, I think they're hoping that will improve member outcomes as well, and value.

Let's get to some of the items then. So we've got four DB related items. I've got my list here. The first of those is DB surplus flexibility. So the government's talked about 160 billion pounds worth of money that is in surplus in pension schemes that's currently, effectively, trapped in those schemes, and they think could safely be released in some way. Could you talk to us about what changes are coming in as part of the bill?

GLYN BRADLEY: Yeah, so at the moment, what a scheme can do with its surplus in terms of returning that to the employers, is very much down to how those rules and the deeds were drafted a long, long time ago. So the government is going to give trustees a power to change their rules with whatever conditions they want to put around that, to enable them to pay surplus out to the employers if they agree.

So the idea here is that opens up a discussion between the trustees and the employer about using the scheme in a way that surplus can come back to the employers. And the idea there is that might promote schemes running on a bit longer. It might allow them to take some more investment risks. It might, as I said earlier on, allow them to put more money into those long-term, illiquid assets that the government's keen schemes invest in.

HOWARD JOHNSON: So it goes back to that underlying theme of investing in the UK. I guess, yeah, a couple of things come to mind from what you've mentioned there. First of all, it sounds like the trustees hold quite a lot of power on this. They're the ones who have the ability to change the rules and pass a resolution, I think.

And the other thing is, I guess as part of that, they may negotiate, actually, as well as some money going back to the employer, there might be something in this for members in some cases as well. So there'll be some interesting conversations between trustees and employers, won't there?

GLYN BRADLEY: Yeah, but I think it's going to be very scheme specific, what each set of trustees and employers are going to agree around this. I don't think there can be a general rule about what members will get or what the employers share.

You've got to think about the history of how did that surplus come about. What's the balance of powers and schemes? What are the people's expectations going back a very long way? And I think trustees are probably as best placed as anybody to decide how to carve that up.

HOWARD JOHNSON: Yeah, there's plenty we could talk about on that topic alone. We won't do so today. But for any listeners who are interested in knowing more about this, there is a separate episode titled "Pension Surplus-- Is It a Real Opportunity?" that was released on the 11th of March. So refer people to that.

So second on my list in relation to DB is the Virgin Media element. Or section 37 remediation is the more technical term. I think this is your favourite, isn't it?

GLYN BRADLEY: Yes, a good pensions technical favourite. So there's a lot of schemes out there, where when they changed their rules, broadly speaking, between 1997 and 2016, needed to have a confirmation from the actuary to validate that.

I won't go into the detail there. But essentially, after the Virgin Media case and the judgments we've had on that over the last few years, doubt has been cast on what would happen if you couldn't find that confirmation.

So it's not that necessarily it's been proven not to have happened, but actually proving it has happened can be a challenge with the passage of time, and archives of paper, and everything else. So what this does is allows the scheme actuary to say it's reasonable, in their view, to conclude that a scheme actuary back then, these amendments would not have prevented the actuary from giving that confirmation. And that just removes this existential doubt that some schemes might have about whether their deeds were valid.

HOWARD JOHNSON: Yeah, this could have been really problematic.

GLYN BRADLEY: Absolutely. Because you think you changed some rules 20 years ago. And now someone's calling into question, or just the chance, just the chance that it might be called into question. You can now put that beyond doubt. It won't work in every single case. It needs to be clear on that.

There are still some tests to go on this, to go through with the scheme actuary. The FRC have issued guidance on this, as has the pensions regulator. But we hope that in most cases, it will give schemes that certainty they're looking for.

HOWARD JOHNSON: And once the bill becomes enacted, it's had royal assent, will that be everything we need on this? Or is there anything more to come?

GLYN BRADLEY: Yeah, essentially once this act has got royal assent, this bit of the legislation is in force immediately and available to use. Now, the government could tweak it further on. It's got the power to do that. But essentially, it's ready from day one, unlike most other things in the bill, where we're going to be waiting for regulations to build on the skeleton that the pension schemes act is going to provide us for and will come in over the next four or five years.

HOWARD JOHNSON: I mean, the pension surplus item we just talked about, that's expected to come in 2027.

GLYN BRADLEY: That's right. That's next year. And we're expecting some guidance from the regulator this May, next month.

HOWARD JOHNSON: Yeah, OK, I think our next item then, so there's a couple of things that relate to the PPF. So first of all, I think a bit on levy. So if you can talk us through that. And then we'll come to the PPF compensation and how increases on that will change. So first of all, levies.

GLYN BRADLEY: Yeah, levies, I mean, a lot of listeners will know that the PPF has been concerned not to cut levies down to zero, even though it didn't really need a levy. Because of a technical reason, it couldn't then scale it back up again if circumstances changed and it wanted to have a levy. The bill essentially allows the PPF to cut the levies down to zero, and then go back to the kind of number it might need if it needed it in the future.

HOWARD JOHNSON: So a good news story for schemes.

GLYN BRADLEY: It's also abolishing the PPF administration levy as well.

HOWARD JOHNSON: So yeah, really, really good news for schemes. I think the 2025-26 was the first PPF levy that was set at zero. And the 26-27, they've confirmed will be zero as well. So positive news for schemes. And then PPF compensation levels, what's changing?

GLYN BRADLEY: Yeah, so the PPF has got this big surplus. And it doesn't pay increases, at the moment, on compensation for pre-1997 benefits. So what the government has agreed is that going forward from January 2027, the PPF will be able to increase its PPF compensation for pre-97 members, well, for some of them, only if the scheme that fell into the PPF guaranteed sum increases to those people's benefits before it went in, and only going forward. So it won't be doing catch up increases back to when the scheme fell into the PPF.

HOWARD JOHNSON: So some level of protection from inflation, but--

GLYN BRADLEY: Not, I think, what all the members might wish. But more than that we have at the moment.

HOWARD JOHNSON: Yeah, OK. We're now onto the last of our DB related items. And that comes to super funds. So I think with super funds, we've got Clara is the only active super fund out there at the moment. They've done deals. And they've done those under the regulator's interim guidance as existing regulations. What's the pensions bill going to change in this area?

GLYN BRADLEY: Yeah, so as you say, at the moment, the regulator's regulating the super funds using all its existing powers. But essentially, it takes a different view of what it expects from that kind of entity. The bill is placing most of that into legislation. So it's a firm base in law. It's not just up to the regulator's policy of the day. The intention here is to give the market confidence that there's a super fund regime there that's going to be stable for the future.

HOWARD JOHNSON: Yeah, and I think even the expectation of this has already led to rumors of new providers coming into the market. The Pensions Trust, which is based up in Leeds, where I was based for a long time myself, they've announced I think they're going to enter the market early 2027. There's a few more that are rumored. So this is clearly having a positive--

GLYN BRADLEY: I mean, I'd like to think this is having is giving people that confidence. Because as you say, there's a few more out there being talked about. And we expect the regulations and the code probably to be coming in around the end of 2028.

HOWARD JOHNSON: Yeah, so probably not as soon as people would hope, but I'm sure that will come quite quickly. OK, I think those are the DB items we were planning to talk about. We'll now move on to a few DC related matters. And we've got five of those.

The first of them is actually my favourite of all the things that are coming in from the bill. And this is guided retirement. Glyn, do you want to describe what that is?

GLYN BRADLEY: Yeah, guided retirement, I think, so Virgin Media is my favourite. But I think guided retirement is probably the one that will have the greatest impact on ordinary DC members' retirements, you and me.

HOWARD JOHNSON: I'm a DC member.

GLYN BRADLEY: So when we retire at the moment, we would have the freedom to go and choose our own pots. And our scheme might give us some support. But what the bill says is that for the schemes in scope, they need to provide a guided retirement default.

They need to do a bit of research themselves, think about the members, and select a product, essentially, or a partnering scheme, and say this is the one we're going to help you go into. And I think that's really important because people do need help with spending their DC pots in retirement.

HOWARD JOHNSON: Difficult decision.

GLYN BRADLEY: We've got auto-enrollment to get people into pension schemes. But once they retire, we don't have the mechanism at the moment to nudge them towards a sensible outcome. The other great thing about this is because every scheme will-- well, not quite every scheme, but the vast majority of schemes we're talking about here, DC members will have to do this, it creates a market for people to innovate.

And we're already seeing interest in things like retirement CDC, talk about flex and fix. Now these are the products and ideas are coming along because we know there's going to be a pipeline to build into in future years.

HOWARD JOHNSON: Yeah, I guess one thing, just a bit of a shout out for LifeSight, which is WTW's master trust, they've announced that they're planning to launch a retirement CDC solution basically as soon as the regulation allows. So that's just one example of a provider that--

GLYN BRADLEY: That's there when I retire.

HOWARD JOHNSON: Yeah, certainly. I think we're really positive. When are we expecting this to take effect?

GLYN BRADLEY: It's not that far off, actually, because they're going to be consulting around the regulations this year. The master trusts will need to start complying-- and start might not mean fully comply, but start complying from next year with other trusts and group personal pensions from 2028. So that's not very far away, really.

HOWARD JOHNSON: Yeah, that'll come quite quickly when-- so I suppose they'll be busily planning, well, as soon as they can. A couple of things just to call out here. First of all, we've got a couple of other episodes that relate to this topic. So the first of those is "Retirement CDC-- The Future of Pensions," that was released on the 25th of February.

And then another episode, it's actually the first part in a two-part series, is "The Nastiest, Hardest Problem in Finance-- Decumulation Debated." The first of those episodes was released on the 25th of March. So a couple of other episodes for people who are interested in this topic to listen to.

The second of our DC items is small pots consolidation. So there's about 13 million small pots. And I think that's increasing by about a million per year, the government estimates. And most of those are-- many of those are dormant. And they've got about under 1,000 pounds in them is the definition of a small pot at the moment. What's in store for these?

GLYN BRADLEY: Yeah, so with auto-enrolment, we've got literally millions of pots being built up of only a few hundred pounds at a time. So if you think about minimum auto-enrolment contributions, someone might only be there for a year or two at that company.

It's a growing problem for two reasons. First, they're disproportionately expensive to administer. So all those many, many pots increase fees, essentially, for members. They're a drag on costs in the industry. Second, it's just really hard for ordinary people to keep track of all these pots. So they're at serious danger of being lost.

And it's kind of hard for people to make decisions about all these little different ones. So the thinking is if we can bring them into fewer schemes, so members have got fewer pots, they'll have better control. And it'll also drive down costs. Looking at that coming in from around 2030.

HOWARD JOHNSON: Yeah, so that's some way off. But yeah, I guess when we think about-- I mean, the pensions dashboard is something that comes to mind, which will hopefully partly solve that problem. At least members, if they engage in the dashboard, they'll be able to find out where their small pots are. That's quite a big if, isn't it, I suppose?

GLYN BRADLEY: It is. And we know members, on the whole, tend to not be terribly engaged. If a process is reliant on them doing something, it always leaves holes. So this would be an automatic process of which members could opt out-- a little bit like auto enrollment, really. This is what's going to happen unless you choose to do something otherwise.

HOWARD JOHNSON: Then we'll move on to our third DC item, which is scale requirements or this mega fund concept. What are the requirements here? And which schemes will this--

GLYN BRADLEY: So broadly speaking, this is aimed at the schemes that if you take on auto-enrolment business for the market, so we're talking about the master trusts and the GPPs, the multi-employer market, rather than the company--

HOWARD JOHNSON: Being in the business of providing pensions.

GLYN BRADLEY: Yeah, If you're in the business of providing pensions as a commercial business, you need to get to about 25 billion pounds by 2030 or have 10 billion pounds at that date, but be on course to get to 25 billion by 2035. It's a real-- yeah, it's going to see a real consolidation of that market.

HOWARD JOHNSON: OK, we'll move on to now the most contentious item. And this is the one that's still subject to some debate, which is this mandation concept. Could you talk us through what that means?

GLYN BRADLEY: Yeah, when people say mandation, which is not a word in the bill, but it's this idea that if the industry doesn't invest in-- the DC defaults, if they don't invest in the illiquid asset classes that the government's quite keen for them to invest in, including a certain proportion in the UK, it will exercise a power and essentially make them do that.

So it emphasises it doesn't want to use it, but it's very contentious because it's touching on the trustees fiduciary duty, their power to decide for themselves what's in members interest. So it's a bit of an issue of principle, as much as anything. There's been a lot of opposition to that in the Lords.

They've eventually remove the clauses. You may have seen that. The Commons are saying, no, we want them back in. But we might have a bit of a compromise. So at the moment, we're waiting to see what compromise will be enough, who will blink first, and whether we can then get this bill turned into an act.

HOWARD JOHNSON: So this is the one area where we think there's still a bit of political ping pong.

GLYN BRADLEY: This is the big one. There are some others where there's been pushback. But I think this is the one that the government has actually responded on and trying to engage with the Lords.

HOWARD JOHNSON: So some of the things we've talked through, some of them are a little bit of a dangling a carrot to encourage schemes to invest more in the UK economy, or that's what the government's hoping. This is a bit more of a stick, isn't it really?

GLYN BRADLEY: Yes, it is.

HOWARD JOHNSON: If it comes to pass.

GLYN BRADLEY: This power is a bit of a threat.

HOWARD JOHNSON: Yeah, OK, our last item relating to DC now. So value for money, what is this? And when is it expected to come in?

GLYN BRADLEY: Yes, so value for money is trying to shift the focus away from costs and assessing the scheme as a product and saying is it offering value for money? And there's a range of metrics and there's a framework for people to judge that. And they'll have to-- they'll have to report their data on this.

And we think probably the first value for money data is going to be published in about 2028. And what we'll see over the next year or so is the development of the regulations to make that happen. But there's an article on wtwco.com, if anyone wants to have a look at that, we've got a good value for money--

HOWARD JOHNSON: Put a link to that in the show notes.

GLYN BRADLEY: And certainly, I think I've posted it on LinkedIn as well, if anybody wants to follow that one up.

HOWARD JOHNSON: Yeah, and there's going to be more published online as well. So members can see if they're are getting value or not, and compare that with other schemes as well as part of this. And this is what I think the government's not said quite openly, that they think this might actually push people away from the idea of running relatively small DC trust-based schemes, and I guess, encourage that consolidation.

GLYN BRADLEY: The presumption from the government is that the small schemes are not able to do what the big schemes are doing in terms of the range of assets they're able to invest in, those illiquids again. And will just be nudged and nudged to consolidate.

HOWARD JOHNSON: Just increase the governance burden and requirements on them. Yeah, OK, I think that takes us to all the items we were planning to cover, I guess we've only been able to touch on most of these. We can only talk about it briefly. Where can people go for further information on all of this, Glyn?

GLYN BRADLEY: Well, what we're planning is an article to just give people a reminder across the spectrum of the Pension Schemes Act 26, as it will hopefully become, of all those different areas linking back to earlier articles we published on wtwco.com for each of the different topics.

HOWARD JOHNSON: Super, OK. So now for our regular listeners, you'll know we have a little bit of fun at the end of our episodes. We've been having fun all the way through, of course, but this is just even more so. We have a little would you rather feature. So I've got a random card here, where I will read out a little would you rather question, I'll just get it out now. OK, Glyn, are you ready?

Thankfully, I'm the host. So I get to ask the questions rather than answer them. But would you rather a lifetime ban from all social media or never watch a movie again? Which would you rather out of those two?

GLYN BRADLEY: I think there's a difference there between what I'd like to do and what's maybe necessary for work. So it'd be quite nice to watch films, but I have no time, certainly with my small children, to actually sit down and watch the whole film.

I'm not someone that likes to scroll through social media, but I think in pensions, for being able to get your message out to a broader audience, and particularly as I'm chair of the pensions board, so I do some stuff for the Institute Faculty of Actuaries as well, to get that message out to the broader thing, LinkedIn is something we need to use.

HOWARD JOHNSON: And I guess listeners as well should flag that you're pretty active on LinkedIn. You're posting about when there are updates in regulations, things coming out that are of interest in the industry. So could get your follower base up here. So yeah, please follow Glyn on LinkedIn. That was a very professional and conscientious choice, Glyn. I think I'd have chosen the movies, personally.

Glyn, thank you for joining us again. And thank you to our listeners. And if you've enjoyed this episode, please like and subscribe and look out for future episodes. Thank you.

Thank you for listening. This podcast is for informational purposes only and does not constitute financial advice. The views expressed by hosts and guests are their own and may not reflect those of their employers or affiliated organizations. All content is protected by copyright.

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