Pension Schemes Bill: Hymans Robertson comments

Commenting on today’s Pension Schemes Bill, Calum Cooper, Head of Pensions Policy, Hymans Robertson says:

“Today marks a seismic shift in UK pensions policy. The Pension Schemes Bill signals a bold, ambitious drive to unlock the untapped potential of pensions for national prosperity. In particular, by enabling the release of defined benefit surpluses and consolidating small pots, the government is laying the groundwork for a more efficient and growth-oriented pensions system.

“It's very encouraging to see today's accompanying Workplace Pensions Roadmap outlining such a clearly sequenced and phased approach. It balances ambition with pragmatism while at the same time acknowledging the need for agility in implementation. While the devil will be in the details, the angels lie in the potential for improved retirement outcomes and economic revitalisation. This is a pivotal moment to harness pensions as a force for good, delivering better retirements and fuelling UK growth.

“It’s a once-in-a-generation opportunity to align pensions policy with national prosperity. It lays some of the essential groundwork which would enable the realisation of our proposals, as outlined in The Untapped Potential of Pensions. These outline how unlocking the untapped potential in pensions could help with better pensions for people by removing barriers to adequacy by saving the Treasury and employers money, all while stimulating much needed investment in the UK. It could generate the £100bn a year that is needed for 3% economic growth and our net-zero transition - all essential ingredients for Phase 2 of the review - reassuringly now committed to happening shortly.”

 

Commenting on the Pensions Schemes Bill and how it has moved the dial on Superfunds, Richard Wellard, Head of Alternative Risk Transfer, says:

“A framework for Superfunds was what we expected, and a framework is what we got. Secondary legislation will set all the important numbers, define important things like ‘very high likelihood’ or ‘material likelihood’, and fundamentally dictate the commercial outlook for any superfund thinking about operating once the Pension Schemes Bill is in force. 

“The Bill has taken on the tricky task of defining what is and what isn’t a Superfund. And has done what looks like a pretty good job. With Superfunds subject to higher regulatory oversight that other pension schemes, what is and what isn’t a Superfund is naturally going to come under a lot of scrutiny from the industry. One potential crease in the definition might come if it is possible to turn an existing pension scheme into something that looks and smells like a Superfund, but doesn’t have to meet Superfund regulations because it never received a transfer in. Time will tell whether that type of situation engineering provides any value.

“A framework for Superfunds was what was expected from the Pension Schemes Bill, and a framework is what was received, concludes Hymans Robertson. A day after the bill was released the firm analyses the key points impacting the Superfund market. From review, it is clear that secondary legislation will be required to set out all the key numbers, define important things like ‘very high likelihood’ or ‘material likelihood’, and fundamentally dictate the commercial outlook for any Superfund thinking about operating once the Pensions Schemes Bill is in force.”

Even without the clarity of secondary legislation, however, there are some interesting points in the Bill.

• Gateway test 1: the rule that schemes that can afford to buy-out member's core benefits are prohibited from transferring into a Superfund, remains, but can be modified by secondary legislation. That is an interesting flexibility as there are scenarios where this gateway test stops Trustees acting in the best interests of their members.

• The Bill helpfully removes the ambiguous gateway test 2 that currently prohibits schemes from transferring into a Superfund if they have a "realistic prospect" of being able to insure benefits in the "foreseeable future".  It is good to see the recognition that the need for this test in the first place was about as unclear as its interpretation.

• Gateway test 3: the very important one about any transfer to a Superfund being in members’ best interest, also remains, and is set in stone so that it cannot be touched by secondary legislation. We see this as the most important test for Superfund transfers and very much welcome this clarity

• There are possible early signs of relaxing capital requirements, with the capital adequacy test for assessing risk in a Superfund being positioned to move from a 5-year horizon to a one year horizon (although this can be changed by secondary legislation). This is a good sign for the Superfund market, and will help address the fact that superfund pricing has turned out to be much closer to buy-out pricing than The Pensions Regulator expected when setting up the interim regime.

• Powers to get tough on individuals. With civil penalties, and imprisonment becoming a consequence of inappropriate actions around the operation of a Superfund or pretending to be a Superfund. It is clearly good to enforce accountability into a system that can impact individuals’ pensions.

• A focus on The Pensions Regulator having scrutiny on individuals with significant influence within the Superfund and specifically approving individuals that can be trustees of a Superfund. How The Pensions Regulator goes about this approval process, will influence the level of operational burden this places on them and Superfunds.

• The Pensions Regulator now has a time limit on deciding on an application for a new Superfund.  An expectation of 6 months, but a limit of 9 months. This is not a particularly quick turnaround time, given the likely interaction with The Pensions Regulator before the application is submitted, but a time limit is welcome nonetheless.

• Schemes with active members are now prohibited from transfers to a Superfund.

Concluding, Richard says:

“Overall, we are pleased to see the dial move on Superfunds and welcome the announcement from this government, and the Pensions Schemes Bill, to take this seismic shift forward for the future of pensions.”

 

Commenting on key elements of the Pension Scheme’s Bill for DC Investment, Alison Leslie, Head of DC Investment, Hyman Robertson says:

"The Pension Schemes Bill laid yesterday sets out some of the most radical changes to the pensions architecture for some time. It's a bold step forward in bringing to fruition the Government's ambitions when it comes to scale and consolidation. 

"Whilst we see this as a step in the right direction, we note that the framework for assessment will be key. The Bill notes the publication of metric data, and within this includes investment performance as information to assess, however we would like to see both forward looking as well as backward-looking performance analysis. The investment strategies of some of the major master trusts have developed significantly over the past five years, and only using a backward measure will not allow for the innovation that has taken place over that time.

“The government’s aim to encourage investment in the UK strikes a good balance between the £25bn ambition and the need to recognise that a transition pathway is essential. We are encouraged by the provision of both the transition pathway and the new entrant pathway allowances. These provide scope for those market participants who already scale, as well as those who are not there yet but have an innovative and market leading mindset. We would not want to see consolidation in the market to such a degree that it results in the herding of particular investment strategies. We also remain of the view that the market is best served through the diversity of providers, and innovation must not be crowded out where value to members can be proven. Challenging remaining defaults through the three-step process is also important and should currently form part of a scheme’s good governance process anyway. This shouldn’t therefore be overly onerous. 

“We are pleased to see that the Bill does not, currently, mandate investment in the UK and hope the government does not feel the need to change its position. Those responsible for pension arrangements should be given proper authority to invest as they see best for their members. This should potentially include good private market opportunities already available to them in the UK. These opportunities should stand on their own merits." 

Commenting on the Bill’s focus on Value for Money, Alison adds:

"The VFM assessments will place a spotlight on schemes and encourage change where they are not performing well. We welcome this and see the benefit of this in the long-term for savers. With the updates around schemes sending ratings to TPR annually and the regulator reserving the right to change them based on evidence - there are no more shades of green!”

 

Commenting on the Pension Schemes Bill and what it means for the LGPS, Iain Campbell, Head of LGPS Investment, Hymans Robertson, says:

“We still very much support the government's intent, but the LGPS content in the Pension Schemes Bill laid today feels lacking. We're disappointed not to see more of the detail that supports implementation, and the goals for local investment. It appears that the detail the LGPS urgently needs, given the short timescales for implementation, will be set out in the guidance to follow, so we hope that's imminent.
 
“In the meantime, while we wait for the Bill to be progressed and the guidance to come, there is significant work for the officers and committees in the LGPS to do to ensure they’re ready for implementation. This is particularly important when thinking about all the work that it will take to be ready for the March 2026 pooling deadline.
 
“The ambitiousness of the government’s plans are not to be underestimated.” 

 

Commenting on some of the DC points announced in today’s Pension Schemes Bill, Kathryn Fleming, Head of DC Consulting, Hymans Robertson says:

“We’re pleased to see the government’s clear timeline for when each initiative around driving value will be introduced. However, we remain eager for the government to address the issue of pensions adequacy. Driving value will support outcomes but is also crucial that a review of what is paid into pensions is also considered. Contributions are arguably the largest factor to drive a savers outcome in retirement. Addressing how today’s savers can save more, whilst also remaining financially resilient today, is a problem that needs urgent focus.

“Contractual override: It is good to see the introduction of contractual overrides to allow contract providers to transfer members out of underperforming and legacy arrangements where this is in a members’ best interests. This will drive focus on the value and performance that employers offer though their DC schemes in both existing and legacy arrangements. Importantly, this will drive employers to consider the value of the arrangements they have in place and gives them more leverage to seek greater value for their employees if they move to better performing providers. We would like to see further detail on the ‘best interest test’ to help determine when the contractual override can apply. 

“Small pots: While the announcement of the government’s plans on small pots consolidation is a step in the right direction, there are practical barriers that need to be considered, such as the re-use of PDP infrastructure. Any feasibility review on this would have to take note of these challenges carefully to overcome these barriers. We fully support any action to make change and welcome the government’s role in working with the pensions industry to help build trust in the process and security of transfers. It would be great to meet the proposed deadline of 2030 for this consolidation to be in force, but this could be a challenge in this timescale. We were pleased to see that the Bill has defined that ‘small’ will start at pots of less than £1,000, but that this could be revised in the future as we have previously argued that the £1,000 threshold is too low and a plan to review this over time will be needed. 

“Guided Retirement: We’re very supportive of the introduction of the requirement for default decumulation solutions. Our research shows that 75% of DC savers aged 55 or over would find it helpful for their DC savings to automatically start paying them an income when they reached the point of retirement, and they were not sure how to use their pension to do this. It is also good to see that default solution will include a degree of longevity protection or ‘regular income’ and a range of solutions will be possible. Protecting against running out of money later in life and providing sustainable incomes is a key requirement of DC savers. The inclusion that default solutions should be regularly reviewed is also welcome, although we note this could be challenging if members are already part way through their retirement journey. So, clarity on how a review and/or change in default would happen in practice will be needed. Similarly, we await further detail on how trustees or managers should assess the needs and interests of its membership. But, we are pleased that this may include the ability for trustees or managers to seek further relevant information from members to help the determine what default solution may be best.”

 

Commenting on the publication of the DWP policy paper ‘Workplace pensions: a roadmap’, Kathryn Fleming, Head of DC Consulting, Hymans Robertson:

“We welcome the news of today’s forthcoming Pension Schemes Bill and are pleased to see the roadmap as laid out by the DWP and the focus on improving adequacy. The aim for this Pension Schemes Bill is to reshape the market and the roadmap makes sense at a high level, helping providers to make key strategic decisions to invest or consolidate with the backstop of 2030. It’s positive to have yet another opportunity for the FCA and TPR to work together to get greater alignment in the retirement experience for future savers. In this example, by having a Guided Retirement product that applies to both trusts and group personal pension plans. We have to be conscious of the fact that the wants and needs of members in decumulation are vastly different, so there will always be members that a default decumulation solution won’t be right for.
 
“It is encouraging to see the signposting within the Roadmap that the second phase of the pensions review for adequacy will be holistic with a focus on three key areas – state, occupational and personal wealth. This will take effort from the industry. It’s imperative that when we consider adequacy, we work together collectively to define it for the good of the industry and our members. Not only will we have to look at the affordability of pension contributions but also whether we need to address the accessibility of members’ savings that have been set aside for the longer term. The degree to which we can personalise the savings experience to each individual to meet their individual needs is another vital factor.
 
“In the review it would be good to see more fluidity between short and long-term savings. As outlined in our paper, The Untapped Potential of Pensions, we believe that considering the role that pensions can play to help people access the housing ladder is a vital element of this innovation. Building on the success of defaults, we are excited to explore the role that default safety net solutions, like side car as trialled by Nest Insight, will play in helping to achieve adequacy.
 
“With a common and unified, definition of adequacy, we can build a roadmap similar to the one that we have seen today for building out scale and value. It is clear that this government is addressing pensions and bringing change in a way not experienced for decades. Employers and Trustees should be delving into the realities of today’s change and thinking about how they can form a practical, well-communicated and beneficial member experience.”

 

Commenting on the Pension Schemes Bill, Sachin Patel, Head of Corporate DB Endgame Strategy, Hymans Robertson, says:

“On the area of DB surplus, the content of today’s Pension Schemes Bill was well trailed by last week’s consultation announcements. Confirming a move to modify rules on surplus extraction for well-funded DB schemes, it does however underscore there are still many important details to work through as the regulations are developed. Notably, this will include the minimum conditions that must be met in order for a payment to be permitted which will safeguard member security.

“Ultimately, it is these details that will prove critical in how the changes play out in practice. Indeed, creating a legislative route to make payments to the employer is just one piece of the puzzle. Schemes will need to carefully tailor any surplus approach to reflect their own situation and consider the appropriate balance of any distribution between employers and members.

“The government’s roadmap suggests it will take some time - until the end of 2027 - before the surplus regulations and guidance will come into force. Nevertheless, today's Pension Schemes Bill marks an important milestone that gets the ball moving and confirms a direction of travel for the many schemes already thinking about long-term strategy.”