DB options consultation response: access to DB surpluses
The government has published a response to its consultation on DB options, setting out details of changes to allow access to DB scheme surpluses and confirming that a public consolidator will not be put in place at this time.
DB surpluses
Currently, only DB schemes which passed a resolution by April 2016 to preserve a power to access surplus are able to do so while the scheme is ongoing. Where schemes can extract surplus, current legislation limits this to surplus on a buyout basis and only where trustees believe extraction is in the interest of members.
The consultation response confirms that the government will remove the need for a pre-April 2016 resolution and introduce a new statutory power to modify scheme rules by resolution, to allow surplus extraction where existing scheme rules do not allow for this. Use of this power will be at the discretion of trustees. The threshold at which surplus release is allowed will be lowered from the current buyout level to full funding on the low dependency funding basis. Extraction of surplus will remain subject to trustee discretion and actuarial certification and the government will not mandate how surplus is used. The current requirement that trustees are satisfied that extraction is ‘in the interests’ of members will be amended to clarify that trustees must act in line with their overarching duties to scheme beneficiaries, which will remain unchanged.
The rate of taxation applicable to surplus extracted from DB schemes will remain at 25% (reduced from 35% in April 2024), though the government continues to consider the wider tax regime for surplus extraction. The government will work with the Pensions Regulator (TPR) to develop guidance to support trustees in considering surplus release. A proposal to introduce an opt-in 100% PPF underpin, where schemes could choose to pay a higher ‘super levy’ in exchange for full member compensation in the event of the sponsoring employer failing to meet their scheme funding obligations, is not being taken forward.
The necessary legislative changes will be made in the Pension Schemes Bill and associated regulations, following consultation.
Government consolidator
Proposals to establish a government-backed DB consolidator, run by the PPF, will not be included in the upcoming Pension Schemes Bill. The government will continue to consider whether there is a place for a public consolidator for schemes that are not able to access commercial consolidation/buyout options and the response includes some commentary on how such a consolidator could work.
Read the consultation response.
Final Pensions Investment Review report
The government has published the final report on its Pensions Investment Review (following the interim report published in November), alongside a response to the 2024 consultation on specific measures arising from the earlier stages of the review. The report and consultation response cover five key themes:
Scale and consolidation in the DC market:
The government will legislate to ensure that master trust arrangements and GPP providers must achieve a minimum level of assets under management (AUM) by 2030. The requirements will not apply to ‘single-employer’ trust schemes (i.e. schemes for employees within one corporate group) or to schemes that are only available to employers linked through their industry or profession. The threshold will apply at arrangement level: each provider must have at least one default arrangement (a ‘main scale default arrangement’ or ‘megafund’) holding GBP25 billion in AUM by 2030.
A ‘transition pathway’ will allow more time for providers or master trusts that have GBP10bn in AUM in their main scale default arrangement by 2030, if they have a credible plan to reach GBP25bn by 2035 and meet other conditions (detailed in the consultation response). Schemes that cannot reach the scale requirements or access the transition pathway will no longer be able to participate in the auto-enrolment market (and would not be able to accept future auto-enrolment contributions). A separate ‘new entrant’ pathway is intended to allow for innovative products and for collective DC schemes.
In line with its objective to reduce the overall number of default arrangements in the marketplace to support the benefits of scale, the government intends to legislate to prevent new default arrangements from being created and operated except with regulatory approval—approval may be available where, for example, the arrangement is necessary to meet the needs of a protected characteristic or ethical need, or for an employer to manage conflicts of interest. However, in response to feedback to the separate consultation, the government will not specify a maximum number of default arrangements or funds per scheme.
The report confirms that the government will introduce a contractual override, with consumer safeguards, to allow contract-based schemes to undertake bulk transfers from underperforming and legacy arrangements as part of the drive for consolidation. Contractual overrides will only be permitted where it is in savers’ best interests, certified by an independent expert. Active employers will be informed (and possibly consulted) but will not have a formal role in the process; individual savers will be informed and will have the ability to opt-out of a proposed transfer and choose a different destination arrangement.
A further review (involving the government, FCA and TPR) will commence in 2029 to assess the impact and operation of the contractual override and VFM framework and ‘to examine the reasons why any default arrangements are continuing to operate outside main scale default arrangements’.
Focus on value rather than cost:
As already announced, legislation for the DC VFM framework will be included in the Pension Schemes Bill. However, the government has decided against proceeding with proposals to impose a duty for employers/advisers to consider value in their pension scheme offering.
Investment in productive assets:
The above measures are intended to ensure that DC pension providers are better placed to invest in asset classes such as venture capital, infrastructure, property and private credit. In light of the recent Mansion House Accord, the government will not introduce legislation mandating investment in private markets at present, but will include in the Pension Schemes Bill ‘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, for the benefit of savers and for the economy’. It states that this reserve power will include safeguards to protect savers’ interests and that any requirements under the power would be consistent with the principles of fiduciary duty.
The VFM framework will introduce measures to require transparency on asset allocation, but those disclosures are not expected to start before 2028. Ahead of that, TPR and the FCA will launch a joint market-wide data collection exercise which will include asset allocation information in workplace DC schemes and will run annually until VFM disclosure data is available. This exercise will request asset allocation information from major DC providers, broken down by asset class and sub-asset class, with UK/overseas splits. The first reporting will be available in early 2026.
Reducing fragmentation in the LGPS:
The government intends to proceed with its proposals to set minimum standards on asset pooling within the LGPS; for LGPS administering authorities and pools to identify local investment opportunities; and to introduce reforms to enhance the governance of the LGPS.
Increasing the pipeline of UK assets available for pension fund investment:
The report lists actions taken by the government that are intended to raise the overall volume of investible UK projects available for pension funds, including housing, transport and energy infrastructure projects and vehicles to attract investment into venture capital funds and innovative businesses.
In his ministerial foreword to the report, Torsten Bell MP states that he will shortly publish a roadmap to ‘provide clarity about our broader strategy and to support the industry through what I appreciate is a time of significant change’. Phase two of the Pensions Review, looking at retirement adequacy and outcomes, will be launched ‘in the coming months’.
Read the Report and the consultation response.
TPR statement of strategy consultation response
TPR has published a full response to its consultation on the statement of strategy, which schemes will be required to submit under the new DB funding regime for valuations with effective dates on or after September 22, 2024. The response provides fuller details of the feedback received and changes made, the key points having already been set out in September’s interim response.
As proposed, there will be four variations on the form of statement of strategy, reflecting different information requirements depending on whether a scheme is before or after its relevant date, and using the Fast Track or Bespoke valuation approach. The consultation response outlines various changes to the templates (already reflected in the September versions published with the interim response) intended to simplify them, allow more flexibility in responses where needed, and ensure they are appropriate for open schemes and less common scenarios such as GMP underpin and cash balance schemes. It also addresses specific feedback on areas where the information requested did not reflect industry practice (for example asset allocation categories) and allows lighter touch requirements in areas such as cash-flow information, recovery plans and covenant information.
As set out in the interim response, TPR will require less information from certain schemes:
- Small schemes, meaning ‘those with 200 members or fewer, excluding members who are eligible for lump sum death benefit only, for hybrid schemes those members with defined contribution (DC) benefits only and fully insured annuitants where they are not included in the calculation of the technical provisions liabilities’. These schemes will need to provide less actuarial information and, where they meet the Fast Track parameters.
- Detailed covenant information will not be required from ‘low-risk schemes’ that:
- follow a Fast Track approach and would be in surplus on a low dependency funding basis after applying an immediate Fast Track stress test;
- follow a Fast Track approach and where full benefits for all members have been secured with an insurer; or
- follow a Bespoke approach which have reached their relevant date and would be in surplus on a low dependency funding basis after the application of an immediate stress test, will not be required to provide detailed covenant information.
Alongside the response, TPR has launched its new ‘submit a scheme valuation’ digital service, which trustees will use to complete and submit their statement of strategy, as well as providing their actuarial valuation, schedule of contributions and recovery plan (where applicable).
Read the consultation response.
HMRC: latest pension schemes newsletter
HMRC has published its latest newsletter (no. 170). The newsletter includes:
- A reminder that from April 6, 2026, all pension scheme administrators (for tax purposes) of a UK registered pension scheme will be required to be UK resident, with steps for making any relevant changes on the Managing Pension Schemes service.
- Guidance on correcting an individual’s tax record for mistakes in various payments, including where pension commencement excess lump sums and stand-alone lump sums have not been reported correctly following the abolition of the lifetime allowance.
- A reminder that the deadline for submitting the 2024 to 2025 annual return of information is July 5, 2025.
Read the newsletter.
