Pension Schemes Act is passed – What happens now?

Despite strong opposition from peers, the Act also includes a ‘reserve’ power which would enable the government to direct that DC master trusts and group personal pension plans (GPPs) invest up to 10% of the assets in their default funds in productive assets. However, to get the Act passed, the government had to add several safeguards, including placing limits on the proportion of assets it can direct are invested in productive assets  (mirroring those set out in the Mansion House Accord), should it choose to exercise this power.

The focus now switches to implementation with much of the detail due to be set out in regulations. We are likely to see several consultations over the coming months, as the government implements its vision for workplace pensions in the UK. We also shouldn’t lose sight of the broader pensions changes that are being implemented outside of the Act – including the extension of inheritance tax on unused pensions and death benefits, the introduction of pension dashboards and the planned cap on pension salary sacrifice contributions. 

You can find out more about all of the major reforms affecting workplace pensions in the UK and keep track of the latest developments on our UK Pensions Tracker.

What does the Act do?

The Pension Schemes Act contains a number of important measures relating to DB schemes, including:

• new rules on use of surplus - this includes new powers for trustees to amend their scheme rules to enable surplus to be repaid to a scheme employer while the scheme is ongoing where certain tests are met. It is expected these powers will be available from April 2027. The government has also said it plans to include measures in the next Finance Bill to enable trustees to pay one-off lump sums to members out of surplus
• a Virgin Media legal fix – this is available immediately and should enable trustees of DB schemes that were formerly contracted-out to address most issues relating to the validity of historic amendments arising as a result of the judgments in the Virgin Media case (for more on this read our previous speedbrief)
• increases on pre-97 PPF compensation – the compensation rules for the Pension Protection Fund (PPF) and the Financial Assistance Scheme (FAS) will be amended so that, broadly, from 1 January 2027, members of the PPF and FAS will be entitled to receive increases of CPI capped at 2.5% on compensation which relates to pre-1997 pensionable service, where increases on pre-97 benefits were provided under the rules of their former scheme
• introducing a statutory superfund regime – the authorisation and supervision regime for DB superfunds is set to be placed on a statutory footing in 2027. This is likely to lead to more superfunds entering this market, and
• abolishing the PPF Administration levy

The Act also contains significant reforms which will reshape the workplace DC pensions landscape. These include:

• introducing new minimum scale requirements for master trusts and GPPs  – which mean, broadly, that existing master trusts and GPP providers will be required to have at least £10bn in assets in their main scale default arrangement by 2030 (and £25bn by 2035) in order to continue operating as automatic enrolment schemes 
• guided retirement - trustees of DC occupational pension schemes will be required to put in place one or more guided retirement solutions for their members (with equivalent rules due to be introduced for GPPs). This is due to apply to DC master trusts from 2027 and all other DC occupational pension schemes (including hybrid schemes) and GPPs from 2028
• introducing a new value for money framework – this will apply to occupational DC schemes (including master trusts and hybrid schemes) and GPPs. It is expected that schemes will be required to publish their first assessments under this new regime in 2028
• reserve power on asset allocation – despite strong opposition in the House of Lords, the  Act includes the so-called ‘reserve’ power which would enable the government to direct that DC master trusts and GPPs invest up to 10% of the assets in their default funds in productive assets (with up to 5% being invested in UK productive assets). Under the final version of the legislation, the government cannot exercise this power until 1 January 2028 at the earliest and it will lapse at the end of 2032, if it has not been used by then. In any event, the government has said it will only do so if master trusts and pension providers fail to deliver on their commitments under the Mansion House Accord, and
• laying the groundwork for the introduction of small pots solution – this is due to be introduced in around 2030

During its passage through Parliament, the government sought to amend the Bill to enable it to publish statutory guidance to clarify the law relating to trustees’ investment duties. However, this amendment was not accepted by the House of Lords. Despite this, we understand the government still intends to publish non-statutory guidance in this area. 

What happens now?

Several of the reforms contained in the Act require regulations to set out more of the details. In particular, regulations will be required before the government can implement:

• the new powers for trustees of DB schemes relating to the use of surplus
• the DC scale requirements
• guided retirement
• the new value for money regime, and
• the small pots solution.

Therefore, we are expecting a series of consultations over the coming months on regulations relating to these various reforms. Some important details to look out for include:

• the funding threshold and other conditions that will need to be met before trustees can make a payment out of surplus to a scheme employer – it is expected that the funding threshold will be set at the new ‘low dependency’ funding level but this will be confirmed in the regulations  
• what the trigger point for guided retirement will be – i.e. when will a scheme be required to steer a member towards a retirement solution that is suitable for them - and what are the related requirements around member communications?
• how trustees should assess the value for money offered by their scheme and what the consequences of a scheme being rated amber or red under the new framework will be.  

What does this mean in practice?

As far as DB schemes are concerned, the two most significant changes in the Act are the new powers relating to the use of surplus and the Virgin Media legal solution. Some DB schemes may already be able to make a payment of surplus to an employer under the existing statutory rules. However, for those that can’t, the new statutory powers should be sufficient to enable this from April 2027, provided the scheme is sufficiently well funded and the trustees agree to it.

The Virgin Media legal solution comes into force immediately and so, where schemes have identified concerns over the validity of historic amendments, there is now a legal fix that trustees can explore using with their legal adviser and scheme actuary.

The DC reforms in the Act will fundamentally reshape the DC workplace pensions landscape by accelerating consolidation. This will lead to fewer, larger DC schemes.

The guided retirement reforms will also reshape how members turn their DC pots into pensions. Trustees will be required to put in place one or more retirement solutions that are suitable for their members. DC master trusts have around a year to prepare for this, while occupational DC schemes have around two. However, there is a lot that schemes will need to do to get ready for this, including:

• deciding what solutions are suitable for different segments of their membership
• designing and implementing suitable solutions or identifying third party arrangements member can transfer into at retirement, and
• updating their member communications and support to help members make good choices

Therefore, it is important schemes leave plenty of time to decide their approach. 

We also recommend that trustees start to identify what data they will need to carry out their assessments under the new value for money framework and consider how their scheme is likely to perform. Trustees will need to carry out their first assessment in 2028, using data from 2027. Therefore, trustees may want to check, using 2026 data, how they expect their scheme to perform so they have time to address any areas of improvement that this identifies.

Comment

This is an ambitious piece of legislation. It contains important changes for DB schemes, which are likely to increase the end-game options for DB trustees by facilitating run-on and encouraging more DB superfunds to enter the market.

The Act also implements the government’s vision for the future of the workplace DC pensions market. It will lead to fewer, larger DC schemes. The guided retirement reforms should also make it easier for members to turn their DC pots into pensions. The government hopes this package of reforms will help to improve member outcomes and facilitate more investment in UK productive assets. There is now a lot of work for the industry to do to turn the government’s vision into a reality.