It has been a busy few weeks in pensions with the Government heavily trailing the Pension Schemes Bill and the Bill receiving its first reading in the House of Commons on 5 June 2025. Referred to by The Pensions Regulator (TPR) as a “once in a generation” opportunity, the Bill contains surplus payment and Pension Protection Fund (PPF) levy flexibilities for defined benefit (DB) pension schemes and the creation of £25bn+ multi-employer defined contribution (DC) ‘megafunds’ that will significantly alter how DC provision is provided from 2030 onwards.
The Bill forms an integral part of the Government’s vision – first and foremost is a desire to build scale through consolidation of the pensions market – this should provide better outcomes including improved value, governance and investment, the latter of which fits neatly into the Government’s desire to see more investment in the UK economy.
The Bill is just the first step towards these changes given much of the detail will be contained in regulations which will be consulted upon in due course. We will therefore have to wait a little longer until all the pieces of the puzzle are in place.
The Department for Work and Pensions (DWP) has also published a roadmap setting out its vision for the immediate future together with indicative timings of the various reforms and how they all slot together (see pages 17 and 18 of the roadmap for a helpful illustration of these).
Read on for a rundown of the key provisions in the Bill. The explanatory notes to the Bill can be accessed here.
DB changes
Power to pay surplus to employer from ongoing scheme
From a DB perspective, the changes in the Bill are not as seismic as the DC-related ones. The amended surplus employer payment provisions are perhaps the ‘star event’ (albeit, most would agree that they do not compete with the Government’s 5 June announcement that it will legislate to address the issues arising from the Virgin Media case).
With an estimated £160bn of low dependency funding surplus on the table, the Government is hopeful that schemes feel comfortable enough in distributing surplus and that a good proportion of this will find its way back into the UK economy through employer investment and member spending. However, this £160bn figure needs to be contrasted against the much lower £11.2bn amount that the Bill’s impact assessment estimates as actually being extracted based on assumed take-up rates.
The provisions do provide some helpful easements – they address the ‘rules lottery’ that prevents some schemes from paying surplus to an employer at all and will allow rule amendments, where appropriate, for those that do allow payment.
Given recent improvements in scheme funding levels, we would expect to see some schemes make use of the new provisions. However, there is some time yet until the new flexibilities will be available which will be disappointing to those who wish to utilise them.
New power to modify scheme rules
- A statutory resolution power (new section 36B, Pensions Act 1995 (the 1995 Act)) is being introduced that will allow ongoing schemes without an existing power to pay surplus to the employer to do so and those with such a power to “remove or relax any restriction imposed by the scheme”.
- Restriction for these purposes includes a section 251, Pensions Act 2004 resolution which will be effectively repealed – such a resolution had to be passed before 6 April 2016 to allow trustees to retain the power to pay surplus to an employer.
Amended restrictions on the exercise of the surplus payment power
- Section 37 of the 1995 Act which sets out restrictions on the payment of surplus to an employer is also being amended. It provides that the power to pay surplus to an employer sits with the trustee and, following amendment, will only be able to be exercised in accordance with regulations.
- The regulations will include the requirement for actuarial certification of funding, what funding level is required before payment can be made (which the Government is ‘minded’ to reduce from buyout to full funding on low dependency) and may include other conditions and the requirement for employer consent.
- The current requirement for trustees to be satisfied that paying surplus “is in the interests of members” is being removed in recognition of its lack of clarity. In its consultation response, the Government confirmed that it will amend section 37 to “clarify that trustees must act in accordance with their overarching duties to scheme beneficiaries”. The regulations may include something on this.
Matters still under consideration
Timings
- 2026: Regulations to be consulted upon.
- 2027: Regulations come into effect. TPR will produce guidance.
Confirmation of TPO as a competent court regarding disputes over charge
Section 91 of the 1995 Act requires that an enforcing court order must be obtained where a member disputes the amount of a charge, lien or set-off made against their benefits. In November 2023, the Court of Appeal decided that The Pensions Ombudsman (TPO) is not a ‘competent court’ for the purposes of recouping overpaid benefits. The Bill amends section 91 to provide that, in addition to a court being able to order enforcement, a TPO determination as to the amount of the monetary obligation will also suffice as will resolution of the dispute between the parties. This means that trustees will no longer have to obtain a County Court order enforcing a TPO determination that they may recoup overpaid benefits – a TPO determination alone will be enough.
Superfunds
Commercial superfunds have been permitted since 2020. However, only one superfund has been authorised (back in 2023) and it has had to operate under an interim TPR authorisation and supervision regime and without any legislative framework. The Bill now includes this framework. However, this is still some way off as the accompanying regulations will not come into effect until 2028. The Government is hopeful that this will lead to expansion of the superfund sector and assist in the consolidation of the DB sector.
Summary
- In summary, superfunds are trust-based occupational pension schemes that DB schemes can transfer to when they cannot access buy-out and the transfer will “make it more likely that” members will receive full benefits.
- The transfer will typically result in a severing of or significant change to the liability of the sponsoring employer towards the scheme.
Capital adequacy threshold must be met
- The replacement employer is backed by a capital buffer made up of investor capital and transferring employer-sourced funds. The buffer must meet the capital adequacy threshold - the scheme assets and capital buffer must mean there is a “very high likelihood” that the scheme’s liabilities will be satisfied in full.
Technical provisions threshold
- There must also be a “very high likelihood” that the technical provisions threshold will be met by the end of one year after an application.
Ongoing requirements
- Superfunds have to meet various governance, structure and management requirements including a duty to monitor the different financial thresholds.
Release of capital buffer
- The capital buffer must be released to the trustees if required by a response plan or at the direction of TPR. It may also be released either when all member liabilities are met or have been bought out and under a permitted profit extraction arrangement.
Notifiable events and events of concern
- Certain events such as a material deterioration in capital buffer investment performance need to be notified to TPR. Events of concern such as an insolvency event or failure to meet a financial threshold must also be notified and a TPR-approved response plan produced. TPR has certain direction-making powers to address such events.
Extension of legislation to similar structure
- The Bill allows for the superfund legislation to be extended to structures similar in nature to a superfund.
PPF (and FAS) changes
PPF levy flexibility
- As previously announced, the Bill will allow the PPF to reduce the levy, potentially down to zero and subsequently increase it again in a reasonable timescale. The PPF has welcomed the provisions for PPF (and Financial Assistance Scheme (FAS)) members, confirming that it will make final decisions on the 2025/26 levy based on the forthcoming changes ‘in due course’ and will hold off on invoicing until it has done so. An update is expected by the end of next month. The provisions should come into effect in 2027.
Amendments to special rules for end of life for PPF and FAS
- An amendment to the definition of ‘terminal illness’ for the PPF and the FAS to extend the life expectancy eligibility element from 6 months to 12 months so that members can take a lump sum at an earlier date.
Provision of dashboards information
- The Money and Pensions Service is provided with the power to provide pensions dashboards information regarding the PPF and FAS.
DC scale and asset allocation
The Government’s DC changes will significantly alter the current DC market. Some have raised concerns regarding the potential stifling of competition and whether the changes will have the desired effect. Although increased size does not necessarily equal improved outcomes, the Government cites evidence from the Australian and Canadian pension systems that supports this approach. We will have to wait and see whether, and to what extent, the changes drive value and wider investment – although this is some way off, we should see the market shift before then as it prepares for the requirements to come into force in 2030.
Main scale default arrangements with at least £25bn AUM by 2030 for multi-employer DC schemes
New multi-employer DC megafunds – asset and scale requirements
- With certain exemptions, multi-employer DC auto-enrolment master trusts and group personal pension schemes will require at least one ‘main scale default arrangement’ with £25bn/+ of ‘qualifying’ assets under a common investment strategy by 2030 to continue. Notably, regulatory approval will be required at both arrangement and asset level.
- These changes are being brought in by expanding the Pensions Act 2008 quality requirements for auto-enrolment.
- What counts as qualifying assets will be predominantly covered in regulations. Unsurprisingly given the Government’s desire for increased UK private market investment, they could reference type, location (whether in or linked to the UK) and minimum % levels. The new asset allocation requirement applies to a ‘default fund’ as opposed to a ‘main scale default arrangement’ which means it could be applied on a wider basis than just the ‘megafunds’.
- The Government has until 31 December 2035 to introduce regulations stipulating what % of the overall assets must be qualifying assets (if in fact it decides to do so). Before using this mandated investment power, the Government must report on how members’ interests would be impacted, the expected effect on UK economic growth and other relevant matters.
Exemptions
- The Government has referred to CDC schemes, schemes used by closed employer groups, hybrid schemes and defaults relating to a protected characteristic, for example, religion as being exempt (as may others).
Transition pathway
- Schemes with at least £10bn in qualifying assets by 2030 can continue through a ‘transition pathway’ concession if they can demonstrate they have a ‘robust and deliverable’ plan to reach £25bn by 2035.
New entrant pathway
- There is also going to be a ‘new entrant’ pathway for new schemes that cannot satisfy the scale requirements to be approved if, amongst other things, they can “demonstrate strong potential for growth, and offer an ability to innovate”.
Contractual override (unilateral change mechanism)
- To facilitate consolidation, the Government will allow contract-based schemes to transfer members without consent into a trust-based or contract-based arrangement (or amend a scheme or change investments in an existing arrangement).
Timings
- 2028: contractual override.
- 2029: default consolidation/fragmentation review.
- 2030: deadline for £25bn+ master trusts and group personal pensions and £10bn-£25bn transition pathway.
VFM framework to be introduced in 2028
What is it?
- A Value for Money (VFM) framework for trust-based DC schemes to evidence they provide VFM and to support a shift from focusing on cost to value will be introduced as from 2028.
- A ‘standardised test’ will consider investments, costs and services quality metrics on a “consistent, transparent and comparable” basis with the results being published and shared with TPR. As with the current ‘specified schemes’ VFM assessment, trustees will have to compare their scheme against comparator ones. They may also have to carry out member satisfaction surveys.
VFM ratings
- There will be three ratings: (1) fully delivering VFM; (2) not delivering VFM (action plan required and a transfer to a VFM scheme a possibility); and (3) intermediate (with gradings) in which case an improvement and action plan must be prepared.
- In both ‘not delivering’ and intermediate scenarios, new employers cannot be admitted to the scheme.
FCA framework for contract-based schemes
- The Financial Conduct Authority (FCA) will be responsible for the new VFM framework for contract-based DC schemes – the two frameworks will complement each other.
Timings
- 2026: VFM regulations.
- 2028: New Framework introduced.
Default pension benefit solutions – a Guided Retirement duty
Trustee decumulation (Guided Retirement) duty
- Trustees of occupational money purchase schemes will have to: (1) set up one or more ‘default pension benefit solution(s)’ to guide them on taking a regular income in retirement; or (2) transfer relevant members to a scheme that does provide such an offering if they cannot do so themselves (or if another scheme could “provide a better outcome for members”.)
Contract-based schemes
- The FCA will be responsible for setting up a similar duty for contract-based arrangements.
Timings (phased)
- The Guided Retirement duty will be phased in during 2027 and 2028.
Consolidation of small dormant pension pots
Small, dormant pots to be transferred
- Unless already held by a consolidator, auto-enrolment schemes will be required to transfer small (being an initial £1,000 or less), dormant (no contributions in the last 12 months or longer with no active investment decisions) pots to an authorised small pots consolidator. Authorised means being either a TPR approved master trust or on an FCA-approved list.
Small pots data platform
- A small pots data platform will be established to facilitate the system. A default and alternative proposal regarding the pot being held in a consolidator scheme will be made by the DWP (or another body) to the trustees subject to those pots already held in a consolidator scheme being exempt. The trustees will then send a transfer notice about the pot and the proposals to the individual who can confirm which option they wish to take. The pot will be transferred under the default if there is no response.
Timings
- The Government hopes to implement its small pots solution in 2030.
LGPS
Along with implementing regulations, the Bill will make asset pooling, improved governance and investment changes to the Local Government Pension Scheme (LGPS) which will see the £392bn LGPS assets consolidated from 86 Administering Authorities into 6 pools by March 2026. For further details of the changes see our in-depth insight.
Next steps
The Bill should receive Royal Assent in 2026, albeit many provisions will be implemented by regulations which are anticipated to be brought into force at a later date in accordance with the DWP’s roadmap.