In Pensions Bulletin we give a snapshot of some recent pensions developments which may set the tone for the coming months. These include:
A 'bumper' Pension Schemes Bill is published with proposed DB and DC changes
The much-anticipated Pension Schemes Bill has been published and although most of the content is as anticipated it still sets the tone for significant changes to come. Alongside measures in relation to the Local Government Pension Scheme, in brief, it covers the following key areas:
Defined benefit:
Refund of surplus: the Bill contains new provisions giving trustees the power to modify their schemes to be able to refund surplus to employers or to amend or restrict existing scheme powers which allow them to do so. These provisions also remove the requirement for certain schemes to have passed a resolution under s251 Pensions Act 2004 before any refund to an employer can be made. Any surplus release will continue to be subject to trustee discretion and actuarial certification but the current expectation is that the threshold at which surplus can be shared will be relaxed from fully funded on a buy out level to a low dependency level. There will be further regulations and The Pensions Regulator (TPR) guidance expected around how these provisions will operate (though the government's intentions are elaborated upon in its response to the consultation on options for DB Schemes which we referred to in our last bulletin.)
Superfunds: the Bill provides a statutory framework for superfunds, covering design, structure and supervision, with more details expected in regulations (anticipated to be consulted on in 2026 and for the regime to be finalised by 2028).
Defined contribution: the range of issues include
- At retirement provision: the obligation on trustees of DC schemes to offer decumulation options at retirement and to provide a 'default pension benefit solution' for members who do not make an active choice or to transfer them to another appropriate arrangement. Trustees will need to develop a 'pensions benefit strategy' to ensure they understand member requirements. These measures will be consulted on and are expected to come into force first for master trusts from 2027 and then other schemes during 2028. This is likely to be a significant shift in retirement provision and understanding the detail and taking appropriate advice on compliance will be crucial for trustees.
- Scale: subject to some exemptions, auto enrolment multi-employer DC schemes will be required to operate at least one default fund with at least £25 billion in assets under management by 2030 (with a transition route for smaller schemes with at least £10 billion of assets under management by 2030 and provisions for new entrants to the market). This clearly points towards more consolidation and on the contract-based side there will be a mechanism for without consent bulk transfers, subject to safeguards.
- Value for Money: provisions are already being consulted upon by the FCA for default arrangements in contract based schemes; these measures now apply a framework for equivalent regulations for trust-based schemes. Regulations are expected to be drafted in 2026/27 and the first value for money assessments are expected in 2028. Any schemes not meeting the value for money criteria could be forced by TPR to merge with another scheme.
- Small pots: the automatic consolidation of certain small (maximum £1000) DC pots; a consultation on this is expected in 2027/28 and the process to begin from 2030.
As much highlighted in the pensions press, the Bill also contains a reserved power for the government to set quantitative baseline targets for default funds of master trusts to be invested in specified private assets (which could be linked to the UK).
There are also provisions to give the Pension Protection Fund ('PPF') more flexibility in relation to the PPF levy (as we have mentioned in previous bulletins and is expected to apply from April 2027) and to provide member data to pension dashboards.
It also provides for The Pensions Ombudsman to make enforceable determinations in pensions overpayment recoupment cases without requiring a county court judge’s order.
The Bill provides a starting point with much of the detail yet to come in regulations and further developments may well take place as it proceeds towards Royal Assent (expected 2026). The timeline provided alongside it suggests many of the key provisions may not be in force for quite some time and will need to be monitored to fully understand the practical implications for schemes as they are finalised.
Government to legislate to address Virgin Media issues
In previous editions of our pensions bulletin we have referred to the considerable issues for pension schemes previously contracted out on a defined benefit basis resulting from the Virgin Media case. The Government has announced that it will legislate to give affected pension schemes the 'ability to retrospectively obtain written actuarial confirmation that historic benefit changes met the necessary standards'. This is good news, potentially removing much potential cost and uncertainty for affected schemes but there is no idea of timescale and the devil will be in the detail to determine the impact of what is proposed.
The Pensions Regulator and the changing nature of trusteeship
In a speech at a recent PMI conference The Pensions Regulator (TPR) spoke on the changing nature of trusteeship, highlighting that trustees play a central role in the pensions system, ensuring the financial security of workplace savers. They said that as pensions change, so should trusteeship and TPR will work with industry to bring trusteeship in line with other professions and corporate governance standards, while maintaining 'a representation of member voice' and crucially preserving the 'unique powers of fiduciary duty'.
TPR also identified what it regards as the five key qualities trustees must have which include saver outcome focus, constructive challenge, to be highly skilled and diligent, collaborative but accountable, and finally to be data-led.
The speech was delivered on the same day the Pension Schemes Bill was published and was timely given the new challenges the Bill will bring for trustees. TPR confirmed it is working with government on a planned consultation on trusteeship and governance next year to make sure the regulatory environment is fit for the future. TPR will also be clearer about what it expects from trustees, launching a new strategy (based on the five traits mentioned above) to raise standards through its approach and oversight with the market. It will also seek to make life easier too by considering how it can reduce any unnecessary regulatory load. In these changing times it is clear that trustees themselves also face new forms of scrutiny and oversight, though the sentiments about trying to ease regulatory overload are helpful.
The Pensions Regulator uses its powers to sanction release of surplus in a scheme winding up
The Pensions Regulator (TPR) has exercised its power (under s69 of the Pensions Act 1995) to allow the trustees of a scheme in wind up to amend the scheme rules to facilitate surplus being paid to the employer.
The benefits of scheme members and beneficiaries, including some enhancements, had been secured in full.
It seemed that increasing scheme benefits in accordance with the scheme augmentation provisions (which the trustees had explored) was not possible. That is because it required principal employer consent which was not forthcoming and, even if it had been, TPR was satisfied that the trustees had thoroughly explored several different options, none of which appeared to be realistically possible. There was no alternative provision in the Scheme rules for the use of surplus assets, and the Scheme rules also precluded the Trustees from amending them to introduce a power to return surplus assets to any scheme employers.
The trustees also considered whether or not the surplus could be returned to employers on 'resulting trust' principles in favour of the originator of the surplus funds but the number of employers in the scheme's long history meant that this would be a complex process where it would be prudent to seek court approval. Another factor why TPR said it was satisfied that an order would be appropriate was that the surplus appears to have arisen because the principal employer continued to pay contributions even after the scheme reached a surplus on a technical provisions basis and where the scheme funding requirements did not require them.
Although this is very much a case on its specific facts, it could be useful for schemes in similar situations. That is, in demonstrating the tests that must be satisfied before these provisions can be used. However, provisions for extraction of surplus under the Pension Schemes Bill may mean that this approach is no longer required.
The Pensions Regulator issues detailed guidance about new options and models for DB pension schemes
The Pensions Regulator (TPR) has issued guidance about the many ways in which DB and hybrid schemes can deliver benefits to their members and explores a range of endgame solutions. The guidance recognises that buy out is not the only route and that market innovation has led to a wider range of financial, governance and insurance options (including running on the scheme) each with their advantages and disadvantages. Using these headings (governance, financial and insurance) it covers areas such as the role of fiduciary management, accredited professional trustees, capital backed arrangements, superfunds and also longevity insurance and buy-ins/buy-outs.
The guidance is helpful in providing trustees of DB pension schemes with detail on specific areas when considering the most appropriate endgame strategies for their schemes. That is, with a wider focus than just buyout, which chimes with the development of other areas such as the superfunds statutory framework under the Pension Schemes Bill. TPR emphasises that it is critical for trustees to take advice and undertake an appropriate level of due diligence, considering the different risks and opportunities involved and documenting any decisions taken.
HMRC announces further policy change to VAT deduction on the management of pension funds
HMRC has issued a note to confirm a change, to apply from 18 June, in its policy on VAT deductions and the management of pension funds.
Previously, where there was a dual use of investment costs by the employer and the trustees, apportionment was required on a fair and reasonable basis to determine how much input tax could be deducted by each party. The new policy is that HMRC will no longer view investment costs as being subject to dual use. Instead, all associated input tax incurred will be seen as the employer's and deductible by the employer subject to normal deduction rules.
Also, where trustees are supplying pension fund management services to the employer and charging for them, provided they are VAT registered, the trustees will also be able to deduct input tax incurred for the purposes of providing those services (subject to normal deduction rules).
The note also says that businesses may need to propose new partial exemption special methods (PESMs) to align their VAT recovery with the new policy (any new PESMs will take effect from the start of the tax year in which the PESM was submitted). It also says that HMRC will publish guidance to explain the policy change by Autumn 2025.
