Public Service Pensions Update: July 2025

This month we lead with three developments relevant to the Local Government Pension Scheme (LGPS) and then move on to eleven more relevant to all public service pension schemes. For all schemes, developments include more guidance on the McCloud remedy, an update and call for evidence on the Pension Schemes Bill, and a consultation response and fresh consultation in relation to bringing most unused pension funds and death benefits within the value of a person’s estate for inheritance tax purposes from 6 April 2027.

If you would like to discuss any of the items in this newsletter, please contact one of the experts listed at the end of the update.

Focus on the LGPS

McCloud remedy | LGPC updates on annual benefit statements and remedy implementation

The Local Government Pensions Committee (LGPC) bulletin for June 2025 contains a number of updates relating to the McCloud remedy. These include two items relating to annual benefit statements and McCloud implementation, and the time-limited discretion to extend the implementation period to 31 August 2026.

Investment | Consultation on changes to the LGPS code of transparency

The LGPS scheme advisory board is consulting on changes to the LGPS Code of Transparency of investment costs and fees. The consultation paper explains that the board "is exploring replacing the centrally procured system with a framework approach, together with the National LGPS Frameworks team, which would continue to offer basic collecting and reporting of cost templates to all funds but allow them to procure data validation and benchmarking services alongside this in a seamless fashion."

The consultation is open until 15 August 2025.

Consultation on transition plan requirements and development of a voluntary transition plan

The government has launched three consultations as a first step in developing a UK sustainability reporting framework. The consultations are on exposure drafts of UK sustainability reporting standards, assurance providers for sustainability-related financial disclosures, and how net zero transition plan requirements could be taken forward.

The transition plan consultation says that "[i]nformation from transition plans has the potential to be transformative for pension funds, including local government pension schemes - particularly in supporting governance bodies, trustees and managers (as well as their investment service providers), to integrate financially material risks and opportunities into investment considerations, thereby enabling better informed decisions."

The consultation document asks TPR to assess the practicalities of net zero transition plans for pension schemes, and TPR has confirmed that it will work with the pensions industry to develop and test a template for an (at this stage) voluntary transition plan for trust-based schemes.

For private sector schemes, formal transition plan requirements might form an extension to existing climate risk governance and reporting standards. It is not clear what the intention would be for the LGPS, but funds might like to follow developments, including TPR's development of a voluntary transition plan.

Funds who would like to respond to the consultation will need to do so by 17 September.

All schemes 

Pension Schemes Bill | Call for evidence and likely timing of royal assent

In the course of her second Mansion House speech (delivered on the evening of 15 July) the UK chancellor said that the Pension Schemes Bill "will be signed into law in the next few months".

For the LGPS, the bill includes provisions and regulation-making powers in connection with asset pools/asset pool companies, governance reviews, and investment strategy and co-operation with strategic authorities. The bill will also modify the effect of part of the Procurement Act 2023 for pools.

In her Mansion House speech the chancellor described these reforms as part of a suite of changes to do "more to ensure that British savers benefit from the success of growing British businesses" by creating "megafunds" in which "larger and more powerful pots of funding [are] invested productively across the country".

Another provision in the bill of interest to all schemes is one set to undo the effect of a recent Court of Appeal decision and remove the need to take the additional step of referring a Pensions Ombudsman decision to the County Court in any case where a member disputes the recovery of past overpayments through equitable set off but a Pensions Ombudsman decision confirms that the fund can proceed.

The bill had its second reading on 7 July and has now been sent to a Public Bill Committee, which will scrutinise the bill line by line and then report to the House of Commons. The committee will meet for the first time on 2 September and is expected to report back by 23 October. It has issued a call for evidence inviting anyone with "relevant expertise and experience or a special interest" in the bill to submit their views to it in writing "as soon as possible, as the Committee can conclude its considerations earlier than the expected deadline." 

Inheritance tax and death benefits | HMRC publishes consultation response, draft legislation and policy paper

HMRC has published for technical consultation drafts of the provisions the government intends to include in the Finance Bill 2025-26. The material published includes draft legislation and a policy paper in relation to bringing most unused pension funds and death benefits within the value of a person’s estate for inheritance tax purposes from 6 April 2027. The consultation is open until 15 September 2025 and the Finance Bill is likely to be published following the Autumn Budget.

HMRC has also published the response to its technical consultation on the process for reporting and paying any inheritance tax due.

The response says that the government has "changed the process set out in the original technical consultation in recognition of the overwhelming feedback from respondents about the drawbacks of the [pension scheme administrator]-led model. The government will make [personal representatives] liable for reporting and paying Inheritance Tax on pensions".

It also says that, from 6 April 2027 "all death in service benefits payable from registered pension schemes will be out of scope of Inheritance Tax, regardless of whether the scheme is discretionary or non-discretionary. This means that there will be consistent treatment of death in service benefits between discretionary and non-discretionary schemes."

"This is in line with the broader policy objective of removing inconsistencies in the Inheritance Tax treatment of different types of pension benefits. It will ensure that there is no behavioural incentive for employers to provide death in service benefits through alternative non-pension trust structures (which would have created a new inconsistency with public sector defined benefit schemes unable to take this course of action)."

"It also means that death in service benefits paid by non-discretionary pension schemes which are currently in scope of Inheritance Tax, such as the NHS and other public sector schemes, will be brought out of scope from 6 April 2027."

The various documents provide more detail. All schemes will need to understand how this change is likely to affect the scheme and its members, and (once the detail is clear) make sure that the changes are clearly communicated to members. 

Data protection | Data (Use and Access) Act receives royal assent

The Data (Use and Access) Act 2025 has received royal assent.

The Act makes changes to the UK's General Data Protection Regulation, the Data Protection Act 2018 and the Privacy and Electronic Communications (EC Directive) Regulations 2003. Schemes need to understand how the Act will affect them. For example, they need to be aware of upcoming changes in the following areas: complaints (a requirement to introduce a data privacy complaints procedure); legitimate interests and purpose limitation; international data transfers; automated decision making; digital verification services; and the Information Commissioner's Office and its powers.

Schemes might like to ask their legal advisers to provide them with more detail and likely timings when they become available.

Pensions dashboards | Updated data matching guidance and more

The Pensions Administration Standards Association has published updated Data Matching Convention guidance. The related press release explains that the new version "recognises recent developments such as the confirmed use of verified data from the GOV.UK One Login service, including verified email, and emphasises the need to adopt criteria which is both secure and effective."  It also includes "best practice criteria for both ‘Match Made’ and ‘Possible Match’ responses, outlines the use of unique identifiers, and explores how data matching performance should be monitored and improved. It also highlights how matching can support broader data improvement efforts across schemes and providers."   

Separately, the Pensions Dashboard programme has confirmed that hundreds of pension providers and schemes and 20 million pension records, as well as the State Pension, are now connected to the pensions dashboards ecosystem.

As the connect date for public service schemes approaches, there are a number of data and cyber compliance steps that funds should be taking.

These include agreeing updated terms of business with scheme administrators and additional voluntary contributions, or AVC, providers and completing some due diligence around the integrated service provider or software provider who will provide or support connection. They also include putting into place or updating scheme data and asset maps to reflect the new data flows that will come out of dashboards connection, completing a data privacy impact assessment updating privacy notices and updating risk registers.

Funds may wish to seek legal advice and review in these areas.

McCloud remedy | HMRC update for scheme administrators

HMRC has published a newsletter to update scheme administrators on the latest news on the McCloud remedy. 

NHS Pension Scheme | New regulations

The National Health Service Pension Scheme (Member Contributions) (Amendment) Regulations 2025 have been made. When they come into force on 1 August, they will amend the rules of the 2015 NHS Pension Scheme to update the member contribution tier thresholds from 1 April 2025 onwards to bring them into line with the agenda for change pay award in England for 2025-2026. The related policy paper provides more detail.  

Governance | TPR sets out its plans for public service pension schemes

The Pensions Regulator (TPR) has published a year two update on its 2024 to 2027 corporate plan.

Of particular interest to public service schemes is the fact that core activities for delivery through 2025 to 2026 include supporting the Ministry of Housing, Communities, and Local Government "as it evolves the regulatory framework for Local Government Pension Schemes" and expanding its "engagement with scheme managers as these new expectations come into force." They also include working with the Department for Work and Pensions (DWP) to expand TPR's supervisory approach to include all public sector/public service schemes. An "open and transparent dialogue with those who run pension schemes and an expanded risk-based and outcome-focused market oversight approach", looking "to collaborate on shared issues but also be clearer on the outcomes we seek for savers so there are no surprises on either side – with swift enforcement action if schemes ignore our warnings."

Pensions review | Government launches stage two of its pensions review and a review of the state pension age

On 21 July, the government launched stage two of its pensions review. A press release confirmed that stage two will be conducted by a (revived) Pensions Commission, which will deliver a final report in 2027. The terms of reference for the Pensions Commission explain that it will consider the long-term future of the pensions system and pensions adequacy, including:

• "outcomes and risks for future cohorts of pensioners on current trajectories through to 2050 and beyond;

• how to improve retirement outcomes, especially for those on the lowest incomes and at the greatest risk of poverty or undersaving;

• the role of private pension provision and wider savings, building on the foundation of the State Pension, in delivering financial security in retirement and supporting those approaching retirement;

• the long-term challenges of supporting an ageing population;

• proposals for change beyond the current Parliament, that build on the measures in the Pension Schemes Bill and ensure Britain in the mid-21st Century delivers financial security in retirement through a pensions framework that is strong, fair and sustainable."

A related policy paper assesses "the state of Britain’s pensions landscape, including the progress made in the two decades since the first Pensions Commission" and draws together "evidence of the challenges facing current and future pensioners which [the] Pensions Commission will consider and make recommendations to address." The policy paper draws on a number of research and analysis papers, including: analysis of future pensions incomes 2025, analysis of automatic enrolment saving levels, planning and preparing for later life, gender pensions gap in private pensions, and pension provider survey 2024-25.

The Pensions Commission terms of reference also confirm that, in line with section 27 of the Pensions Act 2014, the government has launched the next (and third) review of the state pension age. Dr Suzy Morrissey has been appointed to prepare "an independent report on specified factors relating to state pension age" and the Government Actuary’s Department is to prepare a separate report "including on the proportion of adult life in retirement." The findings from both reports will be considered as part of the government’s state pension age review and "may also be shared with the Pensions Commission as it considers the longer-term future of the pensions system as a whole." 

Complaints | The role of the Pensions Ombudsman

The Pensions Ombudsman has confirmed that the Pensions Dishonesty Unit pilot is coming to an end. The news item explains that "[d]ue to broader government funding constraints, DWP funding for the PDU pilot ended on the 31 March 2025, with runoff funds available until October 2025 to complete specific investigations. The threat posed by pensions scams has not gone away and TPO will ensure that affected customers receive signposting to appropriate reporting avenues, such as TPR and Action Fraud, which can limit the impact of wrongdoers and, where possible, hold them to account. We will also point members to potential sources of alternative redress."

The ombudsman has also written to the chair of the work and pensions committee about the PDU and to draw to its attention the impact of the 2024 Court of Appeal decision in Nicola Clark & Michael Bell v the Chief Constable of Derbyshire, Chief Constable of West Midlands Constabulary & the Secretary of State for the Home Department. The letter explains that "Applying the court’s decision is likely to mean that many statutory public sector injury benefit/compensation schemes are outside [the ombudsman's] jurisdiction. This would result in us needing to reject or discontinue up to 60 cases already with us. In turn, that would mean that some individuals will not have access to any ombudsman, and will only be able to bring complaints before the courts (with the attendant cost risk that entails). As this is an important issue, we have sought advice of leading counsel to ensure that we are applying Clark correctly, and we are currently considering that advice. Naturally, we are also liaising with the DWP on this issue and keeping them updated as we develop our position."

The Pensions Ombudsman | Recent decisions

The Pensions Ombudsman has set out its position on the recovery of past overpayments in CAS-52136-P6D3 and CAS-52149-F8K1.

The Pensions Ombudsman has upheld a complaint by a member of the Modified Scheme that he was not offered the opportunity to transfer his wholetime service from the 2006 Scheme to the Modified Scheme. This opportunity was not offered because his service as a regular firefighter after April 2006 was with one fire service, whereas his service as a retained firefighter before April 2006 had been with a different fire service. Applying the principles of statutory interpretation to the 2006 Order and the Amendment Order, and considering the facts of the case, the ombudsman concluded that the member should have been given this opportunity in order to fully remedy the less favourable treatment of retained firefighters identified in the Matthews case (CAS-76722-Z3Z9)

The Pensions Ombudsman has also upheld a complaint relating to a failure to implement an amendment to the Firemen’s Pension Scheme Order (1992). The member argued that the failure to implement a change affecting pensionable pay at retirement resulted in him receiving inflated (and incorrect) retirement benefits and that he would not have retired when he did if he had been provided with the correct information. (CAS-84083-M5S5) 

House of Commons Library | New and updated briefing papers

The House of Commons Library has published or updated the following briefing papers, which might be of interest to public service pension schemes and employers:

• Pension Schemes Bill 2024-25;
• Climate change adaptation and resilience in the UK;
• Pensions: defined benefit superfunds;
• Pensions: collective defined contribution schemes.

This newsletter covers developments relating to public service pensions in England with a focus on the Local Government Pension Scheme.