Contributors
The Pension Schemes Bill is published, TPR enables the Littlewoods Pension Scheme to release its surplus, and the DWP finally intervenes on the Virgin Media / section 37 problem: it's been a busy couple of weeks.
The Pension Schemes Bill
It’s fair to say that the Pension Schemes Bill covered much more ground in relation to DB and DC schemes than was originally anticipated or trailed in the Government's consultation response on Options for DB schemes and in the Pensions Investment Review. However, the timetable for implementation of even the anticipated provisions in the Bill is not as ambitious as some would have preferred. The Bill is likely to receive its second reading before the summer recess (22 July) but it's not expected to become law until 2026, and a raft of secondary legislation will be needed – in particular in relation to the FCA-related aspects – and the consultations and regulations needed won’t be launched until 2027 at the earliest.
In addition, the Government has more plans and has announced that the second phase of its pensions review – when it gets underway - will consider the balance between all elements of the UK system ("state, occupational and personal wealth") to achieve fairness and better retirement outcomes for all.
Reforms affecting DB schemes
| Initiative | Timetable |
| The Local Government Pension Scheme | |
The Government will have power to make regulations as to the management of LGPS assets, participation in and merger of asset pools, pooling vehicles, and governance of scheme managers. In particular:
The deadline for the pooling requirement is March 2026, but some flexibility will be permitted to allow shareholder agreements to be put in place. There might need to be reliefs granted to avoid Stamp Duty Land Tax where land assets to transferred to an already- established pool, and the Bill will make clear that the exemptions to the Procurement Act 2023 will automatically be applied so that each pool has freedom to invest not only in the interests of its own partner Administering Authorities. The Government has announced a number of major reforms to boost the depth and volume of pipelines of investment opportunities (infrastructure, transport, housing, and energy, for example), and the intention is that the LGPS pools – as well as the National Wealth Fund and other funds – will take up some of those opportunities. To facilitate this, the Government will mandate that 5% of pooled LGPS funds are invested in UK assets, which should enable another £26billion of additional funding to be released for strategic national and local projects. | March 2026 |
| The Pensions Ombudsman | |
| The Bill provides for the Pensions Ombudsman to be a "competent court", so that overpaid benefits can be recouped on the basis of an Ombudsman determination, without the need for a court order. This solves the challenges that were otherwise created by the Court of Appeal's decision in CMG in 2023. | From April 2026 |
| The Pension Protection Fund | |
The Bill permits:
| From April 2027 |
| Refunds from ongoing schemes – modification power rather than a statutory power | |
There will be a statutory power for trustees to modify ongoing schemes by resolution to either give themselves power to refund surplus to the employer, if there is otherwise no refund power, or to remove restrictions on any refund power which the trustees already have. Any section 251 resolutions that were passed in the period to April 2016 will become redundant and the failure to have passed a resolution will be of no consequence. The conditions upon which a refund can be paid will be set out in regulations. There will be a funding threshold but the Government has indicated that the basis is likely to be low-dependency rather than buy-out. The Government will not mandate how extracted surplus is to be used, but from a policy perspective, we expect that the Government is hopeful that businesses will re-invest the surplus for growth, rather than pass the value to shareholders. The Government expects that Trustees will continue to be responsible for negotiating with employers how members can benefit from surplus extraction. | By the end of 2027 |
| Superfunds – new regulatory framework | |
Superfunds are trust-based schemes which act as DB consolidators and are supported by a capital buffer rather than any substantive employer covenant. They will be subject to authorisation by TPR, as master trusts currently are. TPR may authorise a superfund if it is satisfied that it will meet certain operational requirements relating to governance and structure, key personnel, funding and investment, reporting, the investment of the capital buffer, and the timing, amount and destination of fund-release from the buffer. TPR will also regulate the transfer market and onboarding between superfunds, needing to be satisfied primarily that:
| April 2028 TPR will issue an associated Code of Practice |
Reforms affecting DC Schemes
| Initiative | Timetable |
| Guided retirement | |
Trust-based DC schemes will be required to offer one or more "default pension benefit solutions", and to adopt and publish a strategy in relation to its default solutions (a "pension benefits strategy"). The Bill specifies those factors to which trustees must have regard when determining benefit solutions, and provisions regarding information which must be given to members. Where trustees determine that it is not practicable to offer a benefit solution, or that other schemes could provide a better solution they will have to facilitate transfers to a suitable scheme which they have selected, so that members can access their desired solution through that arrangement instead. | Phasing in for master trusts from April 2027 The FCA will be responsible for effecting corresponding rules for group personal pension schemes and other contract-based schemes by 2028 |
| "Contractual override" | |
This will affect FCA-regulated workplace and auto-enrolment schemes and will enable the provider unilaterally to amend the terms of their arrangement, change investments or transfer members either internally or to another provider, after notification to the members. The unilateral power will apply only if (acting reasonably) the provider concludes that a "best interests" test is met i.e. the change is reasonably likely to achieve a better, or no worse, outcome for affected members, and an independent expert appointed by the provider will need to certify this. | April 2028 Further requirements will be contained in regulations and FCA rules |
| VFM | |
The Bill extends the new value-for-money framework to trust-based DC schemes. To comply with the regulations which are anticipated, the trustees of these arrangements will have to produce VFM assessments, publish and share the results and assign themselves a rating a prescribed basis, from "fully delivering" to "not delivering", against various VFM metrics, with one or more intermediate ratings. The metrics may include service quality, asset allocation and investment performance, as well as costs and charges and trustees might be required to carry out member satisfaction surveys. Ultimately, TPR will have power to assign a rating if it thinks that the trustees' own rating is incorrect. The implications of a "not delivering" rating will be serious: new employers will be blocked from joining and the trustees will need to submit an action plan to TPR, with powers for TPR to mandate a transfer to another scheme in certain circumstances. | Assessments will start in 2028 |
| DC scale and asset allocation - £25bn assets under management | |
Master trusts and group personal pension schemes used for auto-enrolment purposes will generally need to be approved in respect of both a "main scale default arrangement" and an "asset allocation requirement", by either TPR or the FCA. For main scale default arrangement purposes, the total value of assets which are "managed under a common investment strategy" will have to be at least £25bn, which will be tricky for some arrangements to achieve. However, there is an "aggregation" provision enabling a provider to aggregate assets which are managed under a common investment strategy across any of its in-scope GPPs and/or master trust. The regulations will contain important detail about what counts as a common investment strategy to avoid abuse of the aggregation provision. Any master trust or GPP which does not meet the £25bn mark will be able to apply for "transitional pathway relief" a long as its in-scope assets are at least £10bn and prescribed conditions are met, but they will need to provide a business plan supporting their ability to achieve the £25bn mark. Regulations will prescribe the percentage of total scheme assets of a specified type will have to be "qualifying assets", which will comprise, for example, private equity, private debt, venture capital and interests in land. There is also going to be a power to specify that assets must have a UK nexus, similar to the Government's requirement for LGPS assets. However, to balance member interests, before issuing regulations the Government will have to publish a report which considers the impact of any proposed requirement on members and on economic growth. | 2030 |
| Small pot consolidation | |
There are provisions for the consolidation of small dormant DC pots held by auto-enrolment schemes. The "small" and "dormant tests" are a pot value of £1,000 or less, and no contributions made within the previous 12 months. Consolidators will need to be master trusts authorised for consolidation purposes by TPR, or contract-based providers which meet rules made by the FCA. A "small pots data platform operator", to be designated in regulations, will determine the allocation of in-scope pots between consolidators, and there are provisions as to the operation of the consolidation process, including notices to be given to in-scope members, opt-out rights, and the transfer of pots to consolidators. | Phased in stating in 2030, after consolidation of DC mega funds is underway Consolidators will be able to apply for authorisation from 2028 |
The DWP and Virgin Media
The Government has been lobbied for months in relation to the impact of last year’s Court of Appeal judgment in Virgin Media Limited v NTL Pension Trustees Limited. It has confirmed that formerly contracted-out schemes and sponsoring employers "need clarity around scheme liabilities and member benefit levels in order to plan for the future" and so it plans to "introduce legislation to give affected pension schemes the ability to retrospectively obtain written actuarial confirmation that historic benefit changes met the necessary standards."
We anticipated that the Government would have to take action, given that public sector schemes (in particular the Local Government Pension Scheme, the assets of which are a fundamental component of the Government's agenda to unlock growth) were also contracted out of the State Second Pension and subject to section 37 of the Pensions Act 1995 at the relevant time.
Legislation is expected to be laid in the autumn, although it remains to be seen whether the legislation will specifically assist either those schemes whose benefits have already been bought out with an insurer and are in the process of winding up, or those schemes that have been wound up and where a sponsor might have indemnified the trustees in relation to this risk.
Options for dealing with a trapped surplus: Littlewoods Pension Trust Limited
And finally, last week the Pensions Regulator exercised a rarely-used power under the Pensions Act 1995 to grant a modification order allowing the Littlewoods Pension Scheme Trustee to release to the sponsors what would otherwise be a trapped surplus on wind up.
The application was made because the rules of the Scheme stated that the Trustee could direct that surplus assets be used on wind up to provide a “just and equitable increase in the benefits of persons entitled to benefits under the Scheme”, as long as the Principal Employer consented; the benefits had been bought out in full with an insurer and Principal Employer had stated that it was not willing to give that consent in relation to the remaining surplus.
There was no alternative provision in the rules of the Scheme in relation to the use of surplus assets, and – as is true for a surprisingly high number of schemes – the Trust Deed and Rules prohibited amendments that would introduce a power to return surplus assets to any employer.
The order was given and now the Trustee will need to follow the process under section 76 of the Pensions Act 1995 to consult with (now former) members about the proposed return of surplus.
This decision from TPR signals that policy makers and Regulators are aligned in wanting pension scheme assets – in appropriate circumstances – to flow back to sponsors who can hopefully put them to good use in growing the UK economy. That is very good news for those schemes whose rules lead inevitably to a trapped surplus on winding-up.
This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.
