Pensions: what's coming?

Great care always needs to be taken with scheme amendments, in particular to ensure that they comply with statutory restrictions and the requirements of scheme amendment powers. 

The case of Virgin Media v NTL Pension Trustees highlighted a potential issue for amendments made between 6/4/97 and 6/4/16 where a scheme was contracted-out on the reference scheme test basis.  The High Court held that where written actuarial confirmation that the reference scheme test would still be met was not obtained, any changes relating to benefits covered by the test would be void. This was confirmed by the Court of Appeal in June 2024 and the case is not being appealed to the Supreme Court.

BBC v BBC Pension Trust Ltd considered a restriction in an amendment power which restricted amendments affecting members’ “interests”.  Interests was interpreted widely by the court as applying to accrued and future service rights.  The Court of Appeal upheld this interpretation of the amendment power.

Two other cases further considered restrictions in amendment powers.  Newell Trustees v Newell Rubbermaid UK Services Ltd concerned a restriction on amendments which “would prejudice or impair the benefits accrued” and held that this did not prevent a conversion of DB benefits to DC as some members were better off but it did prevent breaking the salary link. Avon Cosmetics v Dalriada Trustees Ltd considered how the effects of an amendment which made some members worse off could be invalidated for only those members whilst still being preserved for others through the use of an underpin. 

The lesson from the cases is to check the wording of amendment powers carefully and ensure that it and any statutory requirements are fully complied with.

Key documents

Virgin Media

• Virgin Media v NTL Pension Trustees (High Court)
• Virgin Media v NTL Pension Trustees (Court of Appeal)
• Commentary on High Court decision in Virgin Media
• Commentary on Court of Appeal decision in Virgin Media

BBC

• BBC v BBC Pension Trust Ltd (High Court)
• BBC v BBC Pension Trust (Court of Appeal)
• Commentary on High Court decision in BBC case          

Newell

• Newell Trustees v Newell Rubbermaid UK Services Ltd

Avon

• Avon Cosmetics v Dalriada Trustees Ltd

Employers have a duty to auto-enrol workers who are aged 22 or over and have earnings of more than £10,000 and  pay contributions on their behalf. Minimum contributions and benefits are calculated by reference to “qualifying earnings” which are currently between £6,240 and £50,270. 

A new Act  allows for regulations to change the existing age condition (to reduce it to 18) and the definition of qualifying earnings (to reduce the threshold to £0 so contributions are paid from the first pound earned). The Government has said that it intends consult on the detailed implementation of these changes “at the earliest opportunity”. There will be no change to the £10,000 earnings threshold to qualify for auto-enrolment.

The Government also said in November 2023 that it intends to work with TPR to produce guidance for employers on the factors that employers should consider when selecting an auto-enrolment scheme and, in particular, focusing on the need to balance costs, value and service rather than just on costs. However, nothing has so far been forthcoming.

Key documents

• Extension of Automatic Enrolment Act
• Commentary on legislation

The retained EU Law Act means that from 31 December 2023, specified pieces of UK law that are derived from European law ceased to be in force. No pensions-specific pieces of law were repealed.

In addition, European case law and European law principles ceased to be binding on UK Courts. This may have more of an impact on pension schemes as much of the equality case law we have is based on EU principles. The Government also issued regulations which protect much of the existing legal position in relation to PPF compensation and some specific equality issues.

Key documents

• Retained EU Law Act
• Commentary on regulations

The legislation for single and connected employer CDC schemes is now all in force and the first CDC scheme, operated by Royal Mail, has now gone live. 

The Government has issued a consultation on draft legislation to extend Collective Defined Contribution (CDC) Schemes to schemes for non-associated employers which will allow for commercial providers to offer CDC.  There will be an authorisation and supervision regime broadly similar to the regime which applies to master trusts. 

The Government is also continuing to consider the possibility of CDC schemes which provide decumulation-only.  In particular, there were a number of references to the potential role of CDC in decumulation in the Government’s response to consultation on small DC pots, and its possible role as a scheme for life, allowing members to accrue benefits in a single scheme throughout their working lives. 

Key documents

• Consultation on draft legislation to expand CDC to cover schemes for non-associated employers
• Commentary on Mansion House Reforms
• Response to consultation on small DC pots and looking to the future

A consultation paper was issued on 17 July 2023 as part of the Mansion House Reforms.  It looked at what the statutory regime for “superfunds” should be and the features they will need to have.  According to the consultation, superfunds will be primarily aimed at schemes that are 70-90% funded on a buy-out basis and are unlikely to target very small schemes at the outset.  The new labour government has said that it will include superfunds legislation in a new Pension Schemes Bill.

Prior to superfund legislation coming into force, the Pensions Regulator has updated its guidance for both superfunds and employers and trustees considering transfer to superfunds as an option.  In particular, the revised guidance allows capital to be released prior to buy-out if specified criteria are met.

In November 2023, Clara announced that the first scheme had transferred to it and in March 2024 it was announced that the Debenhams scheme would be transferred to it after coming out of a PPF assessment period. In addition, in December 2024, it announced its thrid transaction and the first involving a scheme with a solvent employer.

The previous government also announced that it would establish a public sector consolidator by 2026 and the PFF has welcomed this. .  It is not clear if the current government is intending to take this proposal forward.

TPR has issued a blog post setting out its expectations in relation to capital backed journey plans and similar arrangements and that schemes seeking to use them should seek clearance in accordance with the principles set out in its superfund guidance.

Key documents

• Pensions Regulator interim guidance on superfunds for employers and trustees
• Government response to options for DB schemes call for evidence
• Commentary on Regulator guidance
• TPR blog on capital backed journey plans
• PPF paper on possible features of public consolidator

Legislation for the dashboards is set out in the Pension Schemes Act 2021 and regulations.  Further detail on the information that schemes will need to provide and the timescales for doing so are set out in regulations. In addition, schemes will also need to have regard to technical standards issued by the Money and Pensions Service to ensure that they can connect to the dashboards.

In terms of timing, the long-stop mandatory connection deadline for all schemes in scope is 31 October 2026.  However, DWP has issued guidance (which trustees must have regard to) setting out a staged timetable for connection to the dashboard ecosystem. Whilst the timetable is not mandatory, DWP encourages trustees to follow it “unless there are exceptional circumstances which prevent them from doing so” and TPR has also said that it expects scheme to comply with these timescales.

The connection timetable has different deadlines for schemes depending on size and type. The first deadline is 30 April 2025 for master trusts with 20,000+ members and personal pension schemes. There are then various deadlines up to 30 September 2026 depending on scheme size and type. 

Key documents

Dashboard regulations

DWP guidance on connection and staging dates

Draft technical standards

Pensions Regulator guidance

Commentary on Regulator guidance

On Brexit, GDPR became UK GDPR and everything continued broadly as it was.  However, in 2021, the previous government began consultation on reform to the UK data protection laws and confirmed it intended to go forward with reforms which reduced the burden on industry and delivers better outcomes to individuals. A new data protection and digital information bill is currently making its way through Parliament.

In December 2023, TPR issued revised guidance on cyber security.  The guidance sets out the governance that TPR expects schemes to have in place around cyber security.  It asks trustees, providers and advisers to “report significant cyber incident[s] to [it] on a voluntary basis”.  There is also a reminder that where an incident affects a scheme’s ability to comply with legal requirements, there may also be an obligation to report to TPR.

TPR’s General Code of Practice also contains details about TPR’s expectations around cyber security and data protection compliance.

Key documents

• Consultation on reform of data protection laws
• Response to consultation
• TPR revised guidance on cyber security
• General Code of Practice

As there is continuing concern about the extent to which small DC schemes provide value, the Government and regulators intend to proceed with the introduction of a new Value for Money (VFM) Framework. This would require most DC trustees to publicly disclose key metrics and service standards and to assess the VFM of their scheme against the metrics published by other schemes. The FCA has consulted on a new value for money framework for contract based schemes which includes new requirements for DC scheme schemes to compare themselves to very large schemes.  It is likely that similar proposals will be made in the occupational pensions space and that they will be included in a new Pension Schemes Bill.  

The previous government overnment  said it intended to legislate to impose a duty on DC trustees to offer decumulation services to members at the point they access benefits. It was also proposed that trustees would be required to provide a default decumulation option, although this can be done in partnership with another supplier. The current government has said that it intends to look at pension adequacy so these proposals may re-emerge. 

Key documents

• FCA consultation on value for money
• Value for money response to consultation
• Decumulation options consultation
• Response to decumulation options consultation
• Commentary

The Pension Schemes Act 2021 set out the framework for changes to the existing scheme funding regime which requires schemes to focus more on journey planning and their endgame and cooperate with the employer in drafting a funding and investment strategy to get there.

The Funding and Investment Strategy Regulations set out more detail on what needs to be included in the funding and investment strategy and the factors that need to be taken into account. The regulations envisage that by the point of “significant maturity” (defined in TPR’s code of practice), schemes will no longer be reliant on employer covenant.

TPR has also issued a code of practice setting out how it expects schemes to comply with these new requirements and how it envisages that schemes will de-risk as they reach maturity and factors to consider when assessing covenant. Detailed guidance on convenant assessment has also been issued. 

Once the strategy is finalised, the trustees must complete a formal statement, signed by the chair of trustees, setting it out in a required format. TPR has said that the strategy will need to be submitted in a digital form which will be launched in Spring 2025. In the meantime, it has issued examples of what the statements are likely to look like for different types of scheme.

Key documents

• The Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2024
• Commentary on regulations
• TPR’s funding code of practice
• TPR guidance on covenant assessment 
• TPR information about statement of strategy

The General Code amalgamates 10 of the Regulator’s 16 codes of practice, so much of the content will be familiar. It does not include the existing codes on funding, modification of subsisting rights, notifiable events, material detriment or the specialist codes of practice for master trusts and collective defined contribution schemes. 

Legislation requires trustees to “establish and operate an effective system of governance… [which is] proportionate to the size, nature, scale and complexity of the activities of the… scheme”, regardless of scheme size.  The General Code identifies areas of governance, including policies and processes, that need to be addressed to ensure that trustees comply with these obligations.

All schemes need to review their governance systems but trustees of schemes with 100 or more members should carry out a formal “own risk assessment” of how well their system of governance is working, and the way potential risks are managed. This should be done every three years and the first one should be completed within 12 months of the end of the first scheme year starting after the General Code came into force or, if later, either 15 months from the date on which next actuarial valuation is due or the due date for the next chair’s statement.

Key documents

• General Code
• Commentary

In 2018, the High Court confirmed in Lloyds that schemes have an obligation to equalise for inequalities caused by GMPs in respect of service from 17 May 1990 (the date of the European Court decision in Barber which confirmed that pensions could not discriminate on grounds of sex).

This was followed by a further decision in 2020 on obligations in relation to past transfers, which decided that members who took a CETV may be entitled to a top-up transfer payment.

A number of tax issues arose in relation to rectifying accrued rights and past payments and HMRC have issued guidance on this. 

One solution that schemes can adopt to deal with GMP equalisation issues is to follow a statutory process to covert them into non-GMP benefits.  There are various potential issues with this and the legislation is not as clear as it could be. The previous Government passed the GMP Conversion Act which will allow regulations to clarify some of the existing statutory requirements, but no regulations have so far been issued. 

Key documents

• High court decision in relation to GMP equalisation
• High court decision on GMP obligations in relation to past transfers
• Commentary on GMP transfer decision
• PASA guidance
• Commentary on tax issues

In November 2020, the Government issued a response to consultation confirming that, from 2030, RPI will be calculated using the same methods and data sources as CPIH.

Given the limited availability of CPI-linked instruments, many DB pension schemes use RPI-linked gilts and RPI derivative markets to hedge the inflation risk attached to their CPI-linked liabilities by reference to assumptions as to the extent to which RPI will exceed CPI. Those schemes may see a negative impact on their funding position as a result of this intended change.

Key documents

• March 2020 consultation on reform of RPI methodology
• November 2020 response to consultation

Legislation was introduced in 2021 which required authorised master trusts and schemes with assets of £1billion or more to manage and report on climate-related risks and opportunities. In 2023, TPR carried out a review of the climate change reports produced so far and concluded there were some areas for improvement, including addressing failures to disclose strategy, scenario analysis and metrics at the appropriate level.

In the wake of the LDI crisis in 2022, TPR has issued guidance for trustees on the use of leveraged LDI. In addition, the Bank of England’s Financial Policy Committee and the Work and Pensions Committee recommended that TPR should be given a role in relation to ensuring financial stability.

The Government also continues to look at ways it can encourage schemes to invest in productive finance and is currently undertaking a review on how pension fund assets can be used to “boost growth”. An interim report from the review (issued in November 2024) considers the possibility of legislating for a minimum size and maximum number of DC pension scheme default funds.

Key documents

• Terms of reference of pensions review 
• Interim report of pensions review
• TPR guidance on climate change governance
• DWP guidance on climate change reporting
• TPR review of climate change reports
• TPR Guidance on leveraged LDI

The Pension Schemes Act 2021 contains legislation (not yet in force) which would require scheme sponsors and those connected or associated with them to give TPR and trustees early warning of corporate events that might have an impact on a DB scheme. Draft regulations providing the detail of these new requirements were issued for consultation in 2021. They would have required notification of various corporate events at the point at which a “decision in principle” was made in relation to them. The Government received a considerable number of responses to the consultation pointing out potential issues with the regulations and no final version has yet been issued. 

TPR will consult on updates to Code of Practice 2 (Notifiable Events) and accompanying guidance once DWP have published the final version of the regulations.

Key documents

• Legislation in Pension Schemes Act 2021
• Consultation on draft regulations
• Commentary on consultation

The PPF has consulted on details of the levy for the 2025/26 levy year.  The estimated levy the PPF proposed to collect is £100 million. No changes of substance are proposed to the levy calculation but changes are being proposed which will alter the distribution of the levy to ensure that it continues to be paid by a broad pool of schemes. The PPF expects schemes will pay broadly the same scheme-based levy as in 2024/25.

The PPF is also continuing to engage with the Government on proposals that would allow the levy to be reduced to nil in the future.

Key documents

• Levy consultation for 2025/6
• Levy rules for 2024/25
• Levy timeline with key dates

DWP has been considering what to do with small deferred DC pots in default funds in schemes used for auto-enrolment. These are increasingly expensive for the industry to administer.  

In November 2023, the previous government confirmed that it would proceed with a solution based on transferring benefits to one of a number of default consolidators. The framework would provide for a central clearing house to be responsible for matching deferred pots with a member’s chosen consolidator. The clearing house would also undertake communication with members where they have not previously chosen a consolidator. Where no active decision is made by a member, the clearing house would be responsible for allocating them to one of the authorised consolidators. 

A deferred small pot is one of £1,000 or less in an auto-enrolment default fund into which no contributions have been paid for at least 12 months.

The new government has said that there will be legislation in the new Pension Schemes Bill to deal with this.

Key documents

• Response to small pots consultation and call for evidence
• Commentary on small pots

In July 2023, the previous government asked for evidence on whether allowing extraction of surplus before wind-up might encourage more risk to be taken in DB investment strategies and what the risks of this might be.

Despite mixed views from the industry, the government went on to consult on proposals which would facilitate accessing surplus as well as establishing a public sector consolidator via the PPF for schemes that are unattractive to commercial consolidators. It is not know whether the current government will take these proposals forward.

The Chancellor also said in the 2023 Autumn statement that he would reduce the rate of tax on refunds of surplus from 35% to 25% and regulations came into force on 6 April 2024 making this change.

Key documents

• March 2024 consultation on surplus refunds
• July 2023 call for evidence
• Government response
• Commentary on Autumn statement

The lifetime allowance was abolished on 6 April 2024 by the Finance Act 2024, and new tax-free lump sum allowances introduced (although further changes have been made subsequently to ensure the new regime works as intended).  Under the new regime:

• There is a new personal allowance of £1,073,100 for tax-free lump sums and lump sum death benefits. Lump sums paid above the allowance are taxed at the recipient’s marginal rate of tax.
• There is an additional £268,275 limit for pension commencement lump sums and the tax-free element of uncrystallised funds pension lump sums and stand-alone lump sums.
• The lifetime allowance excess lump sum is replaced by a “pension commencement excess lump sum” which is taxed at the marginal rate.
• Individuals with valid lump sum protections and LTA protections retain their rights to higher tax-free lump sums and lump sum death benefits. The deadline for applying for fixed protection 2016 and individual protection 2016 is 6 April 2025.
• Trustees must provide statements to individuals telling them how much of each of their new allowances is used when relevant lump sums and lump sum death benefits are paid. Where benefits have been taken before 6 April 2024, there is a transitional calculation. 

Schemes should also keep in mind that the minimum age for taking pension for most members will change from 55 to 57 on 6 April 2028 and ensure that affected members are aware of the change. The legislation contains provisions which will give some members a right to an earlier minimum pension age and schemes need to be aware of whether this applies to anyone. There are also provisions allowing for a protected pension age to be transferred to another scheme.

The October 2024 Budget said that from 6 April 2027, “inherited pensions [will be brought] into inheritance tax”.  More detail on what is meant by this is set out in a consultation paper issued by HMRC but the scope of the proposed new tax charge and the benefits that will be covered is far from clear.  The obligation to pay the new IHT liability will fall on scheme administrators.  More details about these changes should emerge in due course.

Key documents

• Commentary on abolition of LTA and new lump sum allowances
• HMRC December 2023 and March 2024 Newsletters
• Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024 
• The Pensions (Abolition of Lifetime Allowance Charge etc) (No. 2) Regulations 2024 
• The Pensions (Abolition of Lifetime Allowance Charge etc) (No. 3) Regulations 2024
• Commentary on changes to normal minimum pension age
• Legislation changing normal minimum pension age 
• Budget 2024
• Consultation on IHT proposals
• Commentary on IHT proposals

In November 2021, regulations introduced new conditions that must be satisfied before trustees can comply with a member’s request for a statutory transfer payment.  The regulations categorised risks as giving rise to red or amber flags.  No transfer can be made where there is a red flag.  Where there is an amber flag, members must be referred to guidance from MoneyHelper.

The Government had a statutory obligation to review the regulations after 18 months and consider if they were working as intended and still fulfilled the policy intention.  Following significant feedback from the industry, it noted material concerns with the amber flag relating to overseas investments in the receiving scheme and the red flag where an incentive is offered to the member. 

The Government said that it would “conduct further work with the pensions industry and the Pensions Regulator to consider if changes could be implemented to the regulations to improve the pension transfer experience without undermining the policy intent”.  However, no draft legislation has so far emerged.

Key documents

• Commentary on transfer conditions
• Regulations
• TPR guidance
• Government report on review of transfer conditions
• Ombudsman determination on overseas transfer condition

In a response to a call for evidence, the Government said in November 2023 that the evidence it had received suggest that “the majority of trustees are well-supported, knowledgeable, and hard-working”. However, the Government believes that trustees and others would benefit from more support, guidance and training.

• It proposed to take action around supporting TPR to put in place a trustee register which should improve communications with trustees; accreditation of professional trustees, although accreditation will for the moment be encouraged rather than mandated; and encouraging updates to TPR’s investment guidance and greater trustee understanding of alternative investments.  It is not clear whether the current government is pursuing this agenda.

TPR has also said that it intends to establish relationships with the 10 largest professional trustee firms with the aim of understanding  what looks like and identifying risks in areas such as ownership structure, skills and experience, diversity, equality and inclusion, conflicts of Interests, and fees.

Key documents

• Call for evidence
• Response to call for evidence