Pension Schemes Bill will help to deliver a UK pensions system fit for the future

The government has released the first draft of the Pension Schemes Bill 2024-2025, with a roadmap that sets out its plan to implement reforms across defined contribution (DC) and defined benefit (DB) workplace pensions.

The draft bill and roadmap published on 5 June bring together reforms that are mostly intended to improve retirement outcomes for members and to support UK economic growth as part of the government's plan to deliver a "private pensions system fit for the future".

DB schemes

For DB schemes, the Bill includes the following:

The legislative framework for commercial DB superfunds  

As expected, a significant proportion of the bill is given over to introducing the long-awaited legislative framework for commercial DB superfunds. Regulations will provide more detail, and the roadmap suggests that the government hopes the framework and any related updates to the Pensions Regulator's superfunds guidance will apply from 2028.

Changes to make it easier to release surplus from ongoing DB schemes

In line with the government's recent response to the "Options for DB schemes" consultation, the bill also includes changes intended to make it easier for trustees to release surplus from an ongoing scheme.

For example, where the scheme rules do not contain a power to make a surplus payment to the employer, trustees will be able to pass a resolution to amend the rules to introduce such a power. Where there is a power, trustees will be able to pass a resolution to relax or remove restrictions. The requirement for trustees to previously have passed a resolution under section 251 of the Pensions Act 2004 will also be removed.

The statutory conditions for payment of surplus to an employer (set out in section 37 of the Pensions Act 1995) will be amended. In particular, the government is minded to replace the requirement that a scheme be more than 100% funded on the buy-out basis with a requirement that it be more than 100% funded on the low dependency basis. Further detail of the funding level a scheme must have before a surplus payment can be made to an employer will be set out in draft regulations, on which the government will consult.

In all contexts – including when deciding whether and how to amend scheme rules – trustees will need to act in accordance with their legal duties. The response to the DB schemes options consultation confirmed that it "is imperative that trustees continue to make surplus extraction decisions in the context of other, wider considerations, including the strength of the employer covenant and the potential for members to benefit from surplus extraction". It also confirmed that, to support trustees in the exercise of their duties, the Pensions Regulator will publish guidance on surplus extraction.

As expected, however, the bill will not change the law to make it possible to make one-off payments to members; unless and until the government changes the law in the future, one-off payments would still be unauthorised payments.

In terms of timing, the roadmap projects that the new rules and guidance on surplus payments are expected to come into force by the end of 2027.

Changes affecting the PPF and PPF levy

The bill will also make three changes specific to the Pension Protection Fund (PPF) and the Financial Assistance Scheme. One of these will be to change the law to give the PPF more flexibility in setting a levy. The roadmap says that any substantial changes the PPF board wishes to make to the levy "will come into force the financial year that begins after Royal Assent (indicatively here, April 2027)". The PPF has also confirmed that it will "take a final decision on the calculation of the 2025/26 levy…in due course" and expects to provide an update to schemes by the end of July. 

Changes to make it easier to recover past overpayments

In the context of recovering past overpayments, the bill will undo the effect of a recent Court of Appeal decision and remove the need for trustees to take the additional step of referring a Pensions Ombudsman decision to the County Court  in any case where a member has disputed the recovery of past overpayments through recoupment (deduction from future payments) but a Pensions Ombudsman decision confirms that the trustees can proceed. This change will, hopefully, take effect some time in 2026.

The bill does not, however, include any provisions to establish a public sector consolidator scheme administered by the PPF. The government, in the response to the DB schemes consultation, confirmed that it will continue to explore this option.

DC schemes

As signalled in the King's Speech last July, the bill and related regulations will introduce a number of new duties for the trustees of DC schemes.

Value for money framework 

 Trustees are likely to need to complete their first "value for money" (VfM) assessment under a new VfM framework in or around 2028.

Guided retirement duty

A  new "guided retirement" duty – a duty for DC trustees to design, make available to members and keep under review one or more default retirement income options - could apply to the trustees of DC master trusts from 2027 and to the trustees of other DC schemes from 2028. 

Consolidation of small, deferred DC pots

And transfer duties under a legislative framework for the orderly transfer of DC pots worth £1,000 or less, which have not received any contributions for at least 12 months, into approved "consolidator" schemes could start to apply in 2030.

For the trustees of DC master trusts and the providers of group contract-based schemes used for automatic enrolment, the bill provides for the "main scale default arrangement" and contractual override outlined in the government's recent response to its consultation on reforms to DC pensions. The intention is that the contractual override will be introduced in advance of the intended 2030 deadline for providers to comply with the main scale default requirement in order to support providers as they seek to consolidate default arrangements and make changes to comply with the VfM framework.

Local Government Pension Scheme

For the Local Government Pension Scheme (LGPS), the bill includes the key legislative provisions outlined in the government's recent response to its "fit for the future'" consultation, together with powers to make regulations to provide the detail.

Timing and fit

The government's roadmap suggests that the bill might receive Royal Assent in 2026 and gives indicative timescales for each measure in the bill to take effect. However, those timescales are intended to show the order of change. The precise timings will be subject to parliamentary time where needed. 

The roadmap also makes it clear that the bill forms part of a bigger picture.

Phase one of the government's pensions review and many of the provisions in the Pensions Schemes Bill are concerned with ensuring "that the money already in the system is performing as well as it can for savers and for the economy." Phase two of the government's pensions review, which is due to begin "in the near future" will then turn "to the wider questions of pension outcomes and what else is required to deliver more adequate retirement incomes for all."

In addition, to "ensure the necessary safeguards and flexibilities are in place to meet the demands of the evolving pensions landscape" the government plans to consult on measures to improve the governance of trust-based schemes later this year.

Osborne Clarke comment

The Pensions Schemes Bill will bring significant changes for DB schemes, DC schemes, and for the LGPS.

In many cases the detail needed for final preparations will be set out in draft regulations, on which the government will need to consult. Trustees and employers might still, however, like to ask their advisers how the measures included in the bill will affect their scheme and then monitor the progress of relevant changes.

For the trustees and employers of DB schemes, the Pensions Regulator's recent guidance on new models and options in DB schemes includes steps that trustees and employers can take to prepare for the new provisions around the release of surplus if they expect those provisions to be relevant and would like to do so.

For DC schemes, the VfM regime, guided retirement duty and small pot consolidation framework will all be significant changes. Employers and trustees who are already considering the possibility of terminating a DC scheme or section and moving members to, for example, a DC master trust might like to take into account the estimated timeframe for the introduction of those new duties.

The "main scale default arrangement" and contractual override changes will not apply in situations where employers sponsor their own DC or hybrid scheme. However, they are likely to have some impact on the DC master trust and group personal pension market. As such, employers and trustees might like to discuss them with their advisers in any project that involves transferring DC members to a DC master trust or other arrangement, or closing a DB scheme to the future accrual of benefits and selecting a DC master trust or group personal pension plan to provide benefits going forwards.

Alicia Ramirez Botas, an Associate with Osborne Clarke, assisted with writing this Insight.