Making sense of the ‘crammed’ legislative agenda for pensions

Since coming to power last summer, the Labour government has launched a wholesale review of the pensions system, from consolidating defined contribution (DC) pension schemes, to freeing up defined benefit (DB) scheme surpluses, to accelerating the pooling of local authority pension assets.

The King’s Speech in July 2024 outlined several areas of pensions-related legislation, but many others have since been announced or promised by policymakers as the government seeks to mobilise pension schemes to help boost economic growth.

“The forthcoming Pension Schemes Bill is set to be a ‘blockbuster’, crammed to bursting with measures affecting everything from the largest DB schemes to micro DC pots.”

David Everett, LCP

David Everett, partner and head of pensions research at LCP, said the upcoming Pension Schemes Bill was set to be “crammed” with policies affecting DB and DC pension provision.

A blockbuster bill

LCP’s research team has studied a range of official sources to assess the front-runners for inclusion in the Bill, which is expected to be published before the summer.

“The forthcoming Pension Schemes Bill is set to be a ‘blockbuster’, crammed to bursting with measures affecting everything from the largest DB schemes to micro DC pots created through automatic enrolment,” Everett said.

“Some of these measures, such as DB superfunds and consolidation of micro DC pots, have been in development for many years and are finally reaching the legislative stage.

“Other measures reflect much more recent thinking, particularly around DB surpluses and the creation of DC megafunds. But it is important to remember that even when the Bill becomes an Act next year, there will still be a lot more secondary legislation needed to fill in the details of these high-level policies, so the pensions industry can expect to be busy in dialogue with the government on the fine details for years to come.”

Measures from the King’s Speech

When King Charles III delivered his speech at the state opening of parliament in July last year, the key measures related to DC pensions included plans to introduce default decumulation paths, small pot consolidation, and a standardised test to ensure trust-based DC schemes demonstrate they deliver value for money.

For DB pension schemes, the speech set out proposed a primary legislative framework for DB superfunds, which would replace the interim regime overseen by the Pensions Regulator.

The new legal framework is expected to include rules on capital extraction and to pave the way for new providers to enter the DB superfund market.

Other expected elements of the bill’s new legislation include ‘tidying up’ measures, LCP said. This includes re-establishing the Pensions Ombudsman as a competent court for the purposes of concluding pension overpayment disputes. This would reverse a November 2023 Court of Appeal decision.

Consequences of the Pensions Review

While the Pensions Review, launched last year, is ongoing, LCP highlighted several pieces of legislation arising from the government’s work.

This included further consolidation in the Local Government Pension Scheme (LGPS) and potential changes affecting the investment strategy of DC pension schemes.

Chancellor Rachel Reeves explained her plans for so-called “megafunds” in her inaugural Mansion House speech in November. Since then, the government has ordered two LGPS pools to wind up and their partner funds to consolidate into other existing pools.

This week, a consortium of pension schemes and providers launched a voluntary initiative, the Mansion House Accord, to increase investment in private markets and UK unlisted assets. This came after weeks of rumours that the government could seek to force pension schemes to allocate to UK investments.

LCP also flagged new rules around DB surplus distribution, with restrictions set to be relaxed to allow trustees more options for using excess funds. A response to the ‘Options for DB Schemes’ consultation issued by DWP in February 2024 is expected imminently. This would need to cover the definition of surpluses and whether trustees should be able to override scheme rules, the consultancy group said.

Elsewhere, the Pension Schemes Bill is expected to include a change to the Pension Protection Fund’s (PPF) levy to allow it to reduce the bill to zero.

LCP said the government seemed less committed to expanding the role of the PPF to allow it to become a public sector consolidator of smaller DB schemes, so this may not feature in the Pension Schemes Bill.