Scale, sustainability, security: Government firms up pensions proposals

Ahead of the expected Pension Schemes Bill, the Government has published the final report on its Pensions Investment Review, plus consultation responses covering DC scale and consolidation, options for DB schemes, and LGPS pooling and governance.

This note focuses on the implications for private sector schemes and providers. On the DC side, major changes are proposed, to drive a move towards "bigger and better" workplace schemes. Meanwhile the Government plans to facilitate access to DB surpluses, with an eye to schemes' "long-term sustainability and security".

Megafunds

The Government will push ahead with proposals for "minimum size" requirements for workplace DC schemes – but not quite as originally envisaged.

The requirements will apply to multi-employer schemes and providers (for simplicity, this note refers only to providers). Own-trust schemes and sector-specific schemes will be exempt, as will CDC schemes and sharia funds.

From 2030, providers will be required to have at least one "main" default arrangement with £25bn+ of assets under management, subject to the exceptions described below.

Note that the Government has opted to apply the minimum size requirement to default arrangements, rather than default funds. Providers will be able to continue with lifestyling strategies within their main default.

Assuming that a provider has a main default of the required size, it will be allowed to operate other, smaller, default arrangements too; there will be no "maximum number". However, providers will not be permitted to create new default arrangements without regulatory approval. Furthermore, from 2028 onwards providers will be expected to consider consolidation – ie moving savers from other default arrangements into their main default. A decision not to consolidate will be justifiable only where consolidation would be contrary to savers' interests. The Government will review progress towards consolidation in 2029. A "legislative underpin" will enable remaining fragmentation to be tackled if need be.

Providers will be required to demonstrate that they have, or are building, investment capabilities commensurate with their scale. This will include suitably-qualified in-house expertise.

A transition pathway may assist providers who have not achieved the requisite scale by 2030. If at that stage a provider's main default is £10bn+ and they have a credible plan to reach £25bn+ within five years, they may apply to the relevant regulator to be placed on the pathway. The applicable deadline will then be 2035 rather than the normal 2030.

There will also be a pathway to assist new entrants to the market. New entrants will be able to apply to the relevant regulator for dispensations. However, they will need to have a credible plan to achieve scale. They will also need to offer something new which could benefit savers or employers.

Providers which cannot meet the applicable requirements will have to exit the auto-enrolment market. They will then be expected to wind up or consolidate.

The Government has decided not to prohibit differential pricing, ie where a provider charges different prices to different employers for the same default arrangement.

"Contractual override"

The Government will introduce a contractual override, to allow contract-based providers to modify contracts or move savers between arrangements without their consent. Initially the override will be confined to workplace schemes. It may later be extended to individual arrangements.

An override would be initiated by the relevant provider. However, providers will need to apply a "best interests" test, and to obtain a positive assessment from an independent expert (eg an actuary).

Providers will need to notify (or perhaps consult) relevant employers before using the override. Providers will also need to notify savers, who will have the right to opt out and self-select.

Associated costs will be met by providers (perhaps split between two, where savers are transferred from one provider to another).

The FCA will make rules as to the override process, and will have a supervisory role.

VFM

The Government will (as expected) make provision for the proposed new value-for-money framework in the Pension Schemes Bill. The first assessments under the framework are expected to take place in 2028.

The Government has decided not to make changes to the legal obligations of employers or their advisers as regards the selection of workplace schemes (eg so as to require employers to consider VFM).

Productive investment

Encouraged by the goals announced in the Mansion House Accord, the Government has concluded that it does not currently need to mandate productive investment by DC schemes.

However, the Pension Schemes Bill will include a reserve power, which would enable the Government, "if necessary", to set targets for investment in private assets, including within the UK. The power will include safeguards to protect savers' interests. Any requirements imposed under the power "will be consistent with the principles of fiduciary duty".

Pending the new VFM framework, major DC providers will be asked to supply asset allocation information to regulators, who, from 2026 onwards, will publish market-wide reports.

The Government highlights various initiatives to boost the productive investment pipeline, including published growth strategies, the Planning and Infrastructure Bill, regional development projects, the National Wealth Fund and the British Growth Partnership.

DB surpluses

The Government will take forward several measures proposed by the last Government in its February 2024 consultation.

There will be a statutory power for trustees to modify DB schemes by resolution, so as to enable surplus to be shared with employers. Use of the power will be a matter for trustee discretion. The Government will work with The Pensions Regulator to develop guidance for trustees.

The Government is "minded" to amend the funding threshold for refunds to employers, from the current buy-out to low-dependency. Details will be set out in regulations, which will be the subject of consultation.

Statutory obstacles to the use of surplus will be addressed. Section 251 of the Pensions Act 2004, which in some cases prevents a refund unless an enabling resolution was passed before April 2016, will be repealed. Section 37 of the Pensions Act 1995, which requires trustees to take account of members' interests, will be clarified. The current wording is sometimes felt to impose a special duty upon trustees, over and above the normal fiduciary duty.

The Government does not plan to change the tax rate which applies to refunds – reduced last year to 25%.

The Government will continue to consider suggestions that legislation should be changed to facilitate one-off payments to members from surplus.

The Government has decided against offering a "full PPF underpin" option for well-funded schemes, in part because the associated levy would typically be unaffordable.

Public sector consolidator

The Government will not, for now, legislate for there to be a public sector consolidator. However, it will continue to explore the idea of a "small, focused" consolidator for hard-closed DB schemes, run by the Pension Protection Fund but separate from the compensation scheme.

Specific issues which the Government is considering include:

• The target market – which could perhaps include not only underfunded schemes, but other schemes (eg well-funded but small) which might struggle to find a buy-out provider.
• How in-scope schemes would be able to access the consolidator – the framework will need to guard against undue risk for the consolidator, and against the moral hazard of employers failing to meet their obligations.
• Whether it would be appropriate for transferring schemes to standardise benefits into a pre-determined structure.
• Whether the consolidator should be underwritten by the Government.

LGPS – pooling and governance

The Government will push ahead with changes to the Local Government Pension Scheme, much as proposed in its November 2024 consultation.

In particular this means that, by March 2026, all investments will need to be managed by pools, with all pools being FCA-authorised. Two of the eight pools have already been told that they will need to merge with other pools.

Looking ahead

Primary legislation to support the proposed measures will be included in the Pension Schemes Bill. The Bill is likely to be published by mid-June.

The Government will launch phase 2 of its Pensions Review "in the coming months". Phase 2 will focus on DC adequacy and outcomes, with the Government acknowledging that "millions are under-saving for their retirement".

The Government also plans to publish a roadmap, to provide clarity on broader pension strategy and phasing.