Scale and surplus at the heart of Pension Schemes Bill

The Pensions Schemes Bill has been laid before Parliament at last. As well as announcing the Bill, the Government has published a roadmap covering workplace pensions initiatives.

The Bill as published is much ambitious than was proposed in the King's Speech, with measures to drive the development of megafunds and to facilitate the use of surplus.

Below we outline the Bill's key provisions for DC and DB schemes.

DC scale and asset allocation

Master trusts and group personal pension schemes used for auto-enrolment purposes will generally need to be approved in respect of both a "main scale default arrangement" and an "asset allocation requirement".

Approval will be granted by a prescribed regulatory authority – presumably The Pensions Regulator or the Financial Conduct Authority as appropriate.

For main scale default arrangement purposes, the total value of assets which are "managed under a common investment strategy" will have to be at least £25bn. Importantly, there is an "aggregation" provision. A provider can effectively aggregate assets which are managed under a common investment strategy across any of its in-scope GPPs and/or master trust. Regulations will specify how these provisions will operate, and (crucially) will say what counts as a common investment strategy.

For asset allocation purposes, a prescribed percentage of total schemes assets will have to be "qualifying assets". Regulations may also provide that a prescribed percentage of total scheme assets of a specified type will have to be qualifying assets. Qualifying assets are assets of prescribed descriptions which are held within default funds. The requisite percentage and asset descriptions will be specified in regulations; the asset types may, for example, include private equity, private debt, venture capital and interests in land. There is also power to specify that assets must have a UK nexus.

As regards the asset allocation provisions, safeguards will apply. Among other things, before issuing regulations, the Government will have to publish a report which considers the impact of any proposed requirement on members and on economic growth. And power to increase prescribed percentages will fall away at the end of 2035.

A sub-scale master trust or GPP will be able to apply to the relevant regulator for an easement (transitional pathway relief), if in-scope assets are at least £10bn and prescribed conditions are met.

In similar vein, a master trust or GPP may be granted an easement (new entrant pathway relief) if it demonstrates "strong potential for growth and an ability to innovate" and meets prescribed conditions.

The authorisation criteria for master trusts will be changed, so as to require trusts to have appropriate investment governance systems, including strategies to recruit and retain expert staff.

The Government envisages that these provisions will take effect in 2030.

VFM

There are measures to extend any new value-for-money framework to trust-based DC schemes.

Regulations may require trustees of specified schemes to carry out VFM assessments, publish and share the results, and assign a VFM rating. Prescribed metrics may include service quality, asset allocation and investment performance, as well as costs and charges. Assessments may involve comparisons with other schemes or with benchmarks. Trustees may be required to carry out member satisfaction surveys.

Ratings will be on a prescribed basis, from "fully delivering" to "not delivering", with one or more intermediate ratings. TPR will have power to assign a rating if it determines that the rating which trustees have assigned is not correct.

If a scheme is "not delivering", no new employers may be admitted and the trustees will be required to submit an action plan to TPR, with powers for TPR to mandate a transfer to another scheme in certain circumstances. In "intermediate" cases, regulations may, among other things, require trustees to submit an action or improvement plan.

The Government envisages that assessments under the new framework will start in 2028.

"Contractual override"

A contractual override will be introduced for FCA-regulated workplace and auto-enrolment schemes.

The override will enable a provider to make unilateral changes to a relevant arrangement: to amend the terms, change investments or transfer members either internally or to another provider.

A provider will be able to make a unilateral change only if (acting reasonably) it concludes that a "best interests" test is met – ie the change is reasonably likely to achieve a better, or no worse, outcome for affected members.

Additionally, a provider will have to obtain certification in respect of a proposed unilateral change, from an independent expert appointed by the provider.

Members will need to be formally notified before any unilateral change is made.

Further requirements will be contained in regulations and FCA rules.

The Government anticipates that the contractual override will apply from April 2028.

Small pot consolidation

There are provisions for the consolidation of small dormant DC pots held by auto-enrolment schemes. The "small" and "dormant tests" are specified: £1,000 or less, and no contributions made within the previous 12 months.

Consolidators will need to be master trusts authorised for consolidation purposes by TPR, or contract-based providers which meet rules made by the FCA.

A "small pots data platform operator", to be designated in regulations, will determine the allocation of in-scope pots between consolidators.

There are provisions as to the operation of the consolidation process, including notices to be given to in-scope members, opt-out rights, and the transfer of pots to consolidators.

Under the Government's plans, consolidation duties will be phased in, starting in 2030. Would-be consolidators will be able to apply for authorisation from 2028.

Guided retirement

Trust-based DC schemes will be required to offer one or more "default pension benefit solutions" (referred to here as default solutions).

A default solution is (broadly) a contractual or other arrangement for providing a regular income in retirement.

The Bill specifies factors which trustees must consider when determining benefit solutions. There are also provisions as to the information which must be supplied to members.

Trustees will have to adopt and publish a strategy in relation to default solutions (a "pension benefits strategy").

Different requirements will apply where trustees determine that it is not practicable to offer a benefit solution, or that other schemes could provide a better solution. Broadly speaking, trustees will be required to facilitate transfers to a suitable scheme which they have selected, so that members can if they wish access a solution through that scheme.

The FCA will be required to make corresponding rules for contract-based schemes.

The Government plans to phase in guided retirement, starting in April 2027.

Refunds from ongoing schemes

There will be a statutory power for trustees to modify ongoing schemes by resolution:

• to give themselves power to refund surplus to the employer, if there is otherwise no refund power; or
• to remove restrictions on any refund power which the trustees already have.

Section 251 of the Pensions Act 2004 will be repealed. Section 251 potentially prevents a refund unless a suitable resolution was passed by April 2016.

The conditions upon which a refund can be paid will be set out in regulations. As at present, a refund will be permissible only to the extent that there is a surplus on a prescribed basis; but the Government has indicated that the basis is likely to be low-dependency rather than buy-out.

The current condition whereby trustees can make a refund only if "in the interests of members" will be repealed. It is not clear what, if anything, will replace it.

These measures are expected to come into force by the end of 2027.

Superfunds

A regulatory framework will be introduced for superfunds – trust-based schemes which act as DB consolidators, and are supported by a capital buffer rather than any substantive employer covenant.

Superfunds will be subject to authorisation by TPR. TPR may authorise a superfund if satisfied that it will meet the operational requirements set out in the Bill.

The operational requirements cover a superfund's governance and structure, key personnel, funding and investment, and reporting. In particular, there are requirements as to the investment of the capital buffer, and the release of funds from the buffer either to trustees or to the superfund's provider.

Transfers to superfunds will be permitted only with TPR approval. For this purpose, TPR will need to be satisfied that "onboarding conditions" are met, including the following:

• the financial position of the ceding scheme is not strong enough to enable buy-out;
• the superfund transfer will make it more likely that the transferred liabilities are met in full;
• the superfund will meet a prescribed capital adequacy threshold immediately after the transfer; and
• there is a very high likelihood that the superfund will meet a prescribed technical provisions threshold one year after the date of the application for approval.

These measures are expected to come into force in April 2028. TPR will issue an associated Code of Practice.

The Local Government Pension Scheme

The Government will have power to make regulations as to the management of LGPS assets; participation in and merger of asset pools; pooling vehicles; and governance of scheme managers.

The Pension Protection Fund

The Bill makes provision as follows:

• To facilitate the setting of a nil PPF levy. The relevant provision is expected to apply from April 2027. A PPF announcement explains the potential implications for the current levy year.
• To enable PPF and FAS compensation data to be made available on pensions dashboards.
• To extend the PPF's power to pay compensation in lump sum form for people who are terminally ill.

The Pensions Ombudsman

The Bill provides for the Pensions Ombudsman to be a "competent court", so that overpaid benefits can be recouped on the basis of an Ombudsman determination, without the need for a court order.

What happens next?

The Bill is likely to receive its second reading before the summer recess (22 July). A Minister will introduce the Bill, and its principles will be debated.

The Bill is not expected to become law until 2026. Secondary legislation will be needed in order to implement many of its provisions.

In the meantime, the Government will set out plans for the second phase of its pensions review. Today's announcement and roadmap indicate that the review will consider the balance between all elements of the UK system – "state, occupational and personal wealth" – with an eye to retirement outcomes and fairness.