"We're not in Kansas anymore" - the Pension Schemes Bill 2025

Like Dorothy’s trip to Oz, does the Pension Schemes Bill 2025 take us somewhere unexpected and new, outside of excepted norms?   That certainly appears to be the intention, although how far it actually achieves this as opposed to being just smoke and mirrors much like the wizard himself remains to be seen. 

In previous decades the main focus of the legislative agenda was ensuring that DB pensions were secure and later, increasing private pension provision and accessibility.   However, the foreword to the Government’s roadmap accompanying the Bill says: “a huge amount of change in our pension landscape is underway... Major shifts… mean new questions are being asked of us that require answering...  The task for the second half of the 2020s is to build not just savings pots but a pensions system.” 

So, what is this new pensions system the Government is building and the questions it thinks need addressing and how does the Bill do it? 

I think talk of a new pensions system is somewhat overstating things, at least for now, but there are definitely moves towards doing things in new ways.  These break down into two main themes: 

• Investment in the UK: The roadmap says: “Pension schemes are in theory the cornerstone of economies. As one of the largest pool of assets… they contribute to financing, and stewarding the private sector investment… Pension schemes should act as reliable stewards of companies and assets in the UK, actively owning assets and companies on behalf of savers up and down the country.”  I am not sure trustees would agree that this is what they should be doing with scheme assets, but we have seen a trend this way in recent years with climate change requirements and ESG policies in SIPs and many of the proposals in the Bill are aimed at further promoting this, although not always in obvious ways.   

The initial consultation on refunding ongoing surplus said that relaxing the current rules could “support schemes to invest… in productive asset allocations”.   The Bill will allow trustees to amend scheme rules by resolution (avoiding potentially restrictive scheme amendment powers) to permit refunds to employers and there will be relaxations to the statutory conditions for doing so.  However, this does not mean that trustees will or indeed should exercise these powers and it will be interesting to see what the promised guidance says and whether these changes lead to the outcome that the Government hopes for. 

The final report of the Government’s Investment Review said that the Government was “strongly encouraged by the… Mansion House Accord” and as a result had concluded it was not necessary to set out investment targets in legislation. However, it went on to say that “the Pension Schemes Bill will include a reserve power which would, if necessary, enable the government to set quantitative baseline targets for pension schemes to invest in a broader range of private assets, including in the UK”.   This power was difficult to find in the Bill and takes the form of one of the authorisation criteria for the new £25 billion mega-default funds GPPs and master trusts will need to have.  Regulations will set out a percentage of specified types of assets that will need to be held which can include private equity and/or UK assets (although there are get-out provisions).  It does not currently read like a power of last resort but more clarity may be provided in the regulations. 

In addition, there are clauses which will further the Government’s consolidation agenda, encouraging larger schemes that are better governed and have the scale to invest in a broader range of asset classes.  In particular, there will finally be a statutory regime for DB superfunds and the Government hopes that this will encourage new consolidators to come into the market as DB consolidation has not proved particularly popular so far. 

• Improving DC member outcomes: Legislation has traditionally focussed on securing benefits for DB members and, in my view at least, slightly overlooked DC members.  Figures published by TPR show that there are currently 9,424,000 DB members compared to over 30,000,000 DC members.   However, despite the vastly greater number of DC members, total DC assets are around £205 billion compared to DB assets of £1.2 trillion.  This suggests that DC members might be getting somewhat less in retirement (although the age of members also clearly factors into the difference).

The Bill does not address the adequacy of retirement incomes. The second phase of the Government’s pensions review (which should be launched “shortly”) will consider that along with “the fairness of the system that has persistent inequalities within it” (not at all sure what that means).  However, it does contain measures aimed at improving outcomes for DC members. 

The most significant of these is addressing difficulties around what to do with a DC pot at retirement.  Trustees will be required to provide members with “default pension benefit solutions” which give a regular income in retirement and take into account their needs and circumstances.  

One of the possible options that trustees might be able to provide is a pension from a collective defined contribution scheme. The Government continues to “work on CDC schemes to be used only in retirement”  but currently there is no indicative timescale for any progress on this. 

In addition, the Bill provides for the consolidation of dormant DC pots of £1000 or less with the twofold aim of removing disproportionate costs from the industry and ensuring members don’t lose touch with them. The new value for money framework should also help to improve member outcomes as trustees may be required to assess things such as the quality of services provided to members, charges and the outcomes of member satisfaction surveys. 

So, will the Bill deliver the intended paradigm shift in the world of pensions?  Will we see ever larger pension funds with trustees that focus on the role of such funds in the wider economy?  Larger funds, yes but I truly find it difficult to imagine that trustees will do what the Government hopes.  Their role, no matter how large the scheme, is to fulfil the terms of their trust, invest the assets in the best financial interests of their members and pay promised benefits.  Supporting UK industry does not necessarily align with these duties however much the Government might want it to.  

I am more hopeful that the focus on outcomes for DC members may, in the long run, yield better retirement incomes for such members, although the provisions in the Bill are clearly not enough on their own to do this. Hopefully the second half of the Government’s review will deliver more.  In addition, none of the proposals will provide any kind of solution for DC members who are approaching retirement now with potentially inadequate pots and no default retirement options available.    

All in all, I think we may still be in Kansas.  There is no fantastical world of Oz, we are just looking at a different view of the same thing!