Pensions UK responds to pension reforms

Business meeting at a wooden table with consultant reviewing documents and using a digital tablet. Photo: Kampus Production/Pexels

Pensions UK, the industry’s main trade association, has submitted its formal responses to three major government consultations that will reshape the UK pensions system. The proposals, from the Department for Work and Pensions (DWP), focus on scaling up defined contribution schemes, releasing surplus from defined benefit funds, and overhauling the general levy.

Scale test reforms face criticism

The government’s plans to encourage consolidation in the defined contribution sector include a minimum size of £25bn for “main scale default arrangements.” These are essentially the default investment strategies for DC master trusts. A full consultation on the “scale test” is not scheduled until next year, but respondents are already highlighting concerns.

Uncertainty about how the test will work is affecting the market. Pensions UK reports some consultants are discounting master trusts that have not yet reached the £25bn level, despite the government giving them until 2035 to achieve this size. The trade body has called for the DWP to clarify a proposed “transition pathway” to support schemes aiming for the threshold.

“Regulation should allow schemes to develop solutions that reflect how people plan to use their savings in retirement, rather than incentivising fewer choices simply to meet a threshold,” said Zoe Alexander, director of policy and advocacy at Pensions UK. She added that the framework must “recognise where scale genuinely exists and give providers the certainty they need to plan and invest.”

Levy overhaul requested

Pensions UK has called for a full review of the general levy after the DWP proposed increases for all scheme types from 2027. The levy funds the work of The Pensions Regulator, the Money and Pensions Service, and the Pensions Ombudsman.

The trade body pointed out that levy income more than doubled between 2018-19 (£43.5m) and 2025-26 (£98.4m). It argues the proposed charges do not reflect the market’s changing nature and would “impose significant additional costs” during a period of major regulatory reform.

“The government should not make significant changes to who pays what before answering the more fundamental questions about what the levy funds, how costs are allocated and whether the system is delivering value for money,” said Julian Mund, Pensions UK’s chief executive. He wants a temporary cap on levy payments while a review is carried out.

Surplus release rules need refinement

In its response to the surplus flexibilities consultation, Pensions UK gave a cautious welcome to the plans for defined benefit schemes. The trade body noted strong support from its members, with 69% agreeing the draft rules struck a good balance between “safeguards and flexibility.”

However, it stressed the need for refinement. The association wants clarity that the low dependency funding threshold should not create an automatic assumption that excess capital will be released. It also highlighted the importance of flexibility in sourcing advice on surplus release, arguing the current wording is too prescriptive.

“These regulations should give schemes a clear and workable framework, not a one-size-fits-all process,” said Zoe Alexander.

Pensions UK might take some confidence in success on this campaign after it successfully lobbied for the abolition of the administration levy paid to the Pension Protection Fund.

Master trusts face levy increases

Master trusts are among those facing the steepest increases under the proposed levy changes. Pensions UK pointed out that the per-member charging method will lead to these schemes being charged proportionately more despite many of them catering for members with small pots.

Higher regulatory costs will have a greater impact on these members, the trade body argued. It also noted that the higher levy makes it more expensive to acquire smaller schemes. This creates a challenge as the government wants the market to consolidate.

Value for Money concerns

A higher levy could also have knock-on effects for schemes subject to the incoming Value for Money framework. Pensions UK contended that increased costs could arise regardless of a scheme’s efficiencies or governance quality.