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The pension schemes bill is being introduced to parliament on Thursday, containing a slew of new policies from megafunds and surplus release, to default retirement solutions, small pot consolidation and value for money. A workplace pensions ‘roadmap’ accompanies the bill, setting out how the range of reforms will be phased.
The new piece of legislation follows on the heels of the final report of the government’s Pensions Investment Review and consultation responses on defined contontribution and Local Government Pension Scheme consolidation and defined benefit surplus.
Work and pensions secretary Liz Kendall said: “The bill is about securing better value for savers’ pensions and driving long-term investment in British businesses to boost economic growth in our country.”
Chancellor Rachel Reeves called the bill a gamechanger, “delivering bigger pension pots for savers and driving £50bn of investment directly into the UK economy”.
Pensions minister Torsten Bell said: “We are ramping up the pace of pensions reform. Workers deserve to get better bang for each buck saved, and these sweeping reforms will make sure they do. Pension saving is a long game, but getting this right is urgent so that millions can look forward to a higher income in retirement.”
Among others, the wide-ranging bill - expected to be introduced in the House of Commons - will legislate for:
default funds of multi-employer DC schemes to be at least £25bn in size by 2030 – described by the government as a “watershed date” for the DC market – and government given a reserve power to direct funds to invest in private markets;
the asset pools serving the Local Government Pension Scheme to reduce from eight to six, with government given powers to direct local authority funds to join a specific pool and to merge pension funds*;
a statutory override for DB schemes to release surplus over a low dependency basis;
DB consolidators such as superfunds;
a new value for money framework for DC schemes;
a requirement to offer default retirement solutions, which can include collective DC, with an opt-out; and
automatic consolidation of deferred small pension pots worth £1,000 or less into one of the multiple default consolidators.
The bill will create further laws, for example giving the Pension Protection Fund greater flexibility over its levy, changing the definition of terminal illness for beneficiaries in the lifeboat fund, and reinstating the Pensions Ombudsman as a ‘competent court’.
The government also refers to supporting pensions dashboards, which were previously legislated for in the Pension Schemes Act 2021.
Not included in the pension schemes bill is a definition of fiduciary duty, which has been lobbied for by ShareAction. The responsible investment campaigners are now working with the pensions industry and unnamed politicians to bring an amendment to the bill that would link fiduciary duty to members’ living standards and would require a similar provision to be made for the LGPS and contract-based DC.
The group’s senior UK policy manager Claire Brinn said the bill as it stands is a missed opportunity to clarify fiduciary duty. “ShareAction will be supporting an industry-backed amendment to address legal uncertainty for pension schemes on the consideration of longer-term impacts and members’ standards of living, whilst ensuring a continued duty to act in members’ financial interests. This asset class-neutral amendment will reduce legal risks for trustees whilst making it easier to - voluntarily - invest in the UK economy,” Brinn said.
Adequacy part of Pensions Review out ‘shortly’
In a ‘roadmap’ published today, Bell reiterates that his priority are the returns and risks for scheme members, before savings rates, but adds: “I am then looking forward to launching the second phase of the Pensions Review shortly.”
The roadmap sets out how the reforms will be staggered, stressing that the key is in the sequencing rather than the exact timing.
For example, duties around small pots consolidation are unlikely to be applied before the £25bn default fund requirement comes in, to try to avoid these merger processes to interfere with each other. The late introduction of small pots consolidation would also allow time for the delayed pensions dashboards to go live before the government tackles the next large IT project, the clearing mechanism needed for automatic merging of small deferred DC pots.
DC timeline Source: DWP DB timeline Source: DWP
Trusteeship to become aligned with corporate governance
The sheer amount of change means regulation will need to evolve, the roadmap states, pointing to a previously announced governance consultation, due out later this year.
In a speech at the Pensions Management Institute’s annual conference today, the chief executive of the Pensions Regulator, Nausicaa Delfas, suggested the role of pension trustees will be brought into line with other standards in the corporate and financial sector.
Referencing the UK Corporate Governance Code, she said: “We don’t need to re-invent the wheel: after all, pensions are operating in a mature financial system. But with responsibility for the financial wellbeing of millions of people in the UK, trusteeship needs to come into line with other professions and corporate governance standards. Learning from others and applying the best of analogous regimes within our own regulatory sphere of influence must be the goal.”
Consultation on VfM framework ‘in due course’
The pension schemes bill is a “once in a generation opportunity to address unfinished business in the UK pension system”, said Delfas.
“We have long advocated for fewer, larger well-run schemes with the size and skill to deliver better outcomes for savers,” Delfas said. “As such we are also pleased to see the proposed legislative framework for DB superfunds, providing options and choice in defined benefit consolidation.”
Superfunds and the schemes and sponsors choosing this path have so far relied on an interim regime created by TPR, as legislation was omitted from the Pension Schemes Act 2021.
TPR, which has worked with the Financial Conduct Authority on the value for money framework, also revealed that further industry consultation on the framework is expected “in due course”.
Michelle Ostermann, chief executive of the PPF, was pleased to see “especially the measures which would give the Pension Protection Fund greater flexibility to reduce the levy, enable PPF and Financial Assistance Scheme member data to be made available for pension dashboards, and better support members with a terminal illness”.
Considerable work lies ahead and timescales are ambitious, says industry
The pensions industry has expressed relief about the clarity the bill provides but noted that much work will now start around the detail.
Rachel Croft, who chairs the Association of Professional Pension Trustees, highlighted concerns over measures that would restrict trustees in making investment decisions that best suit their schemes.
She added: “It is important too that the administrative and regulatory provisions that follow on from the bill are considered and introduced in a proportionate way and within realistic timescales that reflect the huge additional load being taken on board by trustees and the industry as a whole.”
Sophia Singleton, president of the Society of Pension Professionals, said that it was time for the detail after engagement over several months: “We will support policymakers with the considerable work that lies ahead to develop the regulations and guidance that must underpin and deliver these initiatives."
She added: "As well as considering the impact the changes will have, it will be crucial to get the sequencing right.”
A lot can happen before the bill becomes law, noted senior partner at Sackers, David Saunders: “A bill’s passage through parliament is a long and winding road, and there could be several twists and turns along the way.”
There appears to be industry consensus that the government’s timescales are ambitious. A rushed approach could be costly, undermining achievement of the policy objectives and broad backing for the bill, cautioned Stewart Hastie, chair of the Association of Consulting Actuaries.
He also wants to see government action to mitigate the impact of the Virgin Media case before the end of the year. Today, the Department for Work and Pensions has confirmed it will legislate to give affected pension schemes the ability to retrospectively obtain written actuarial confirmation that historic benefit changes met the necessary standards.
Aegon’s pensions director Steven Cameron found there was “a huge amount to be welcomed in this blockbuster of a pension schemes bill”.
Reforms that simplify pensions governance and deliver benefits to savers should be applauded, but the bill needs to be checked to see that it does that, said Sankar Mahalingham, managing director of LawDeb Pension Trustees.
He welcomed the value for money regime and small pots reforms but added: “While the creation of ‘megafunds’ may be an effective way to lower costs and streamline asset options, the government must ensure that, at its core, this is a driver for increased performance for savers - and not, as may be thought by some, just another tool to serve their agenda for economic growth."
What are your thoughts on the sequencing and timeline of the reforms?
*This article has been updated to clarify that merger powers relate to 'pension funds'
