Pensions UK responds to government investment threshold proposals

The Department for Work and Pensions has established a minimum threshold of £25 billion for default investment arrangements in defined contribution master trusts. Although a full consultation on this scale test is not scheduled to take place until next year, the issue is already being highlighted in the context of the broader Value for Money framework consultation, which is nearing its conclusion. Respondents are drawing attention to the consolidation aspect of the reforms, with several expressing uncertainty about the practical application of the test and what constitutes a main scale default arrangement.

This uncertainty is having a tangible impact on the market, as reported by Pensions UK, with some consultants already factoring in the £25 billion threshold when evaluating master trusts, despite the government’s allowance for these schemes to reach this size by 2035. According to Zoe Alexander, director of policy and advocacy at Pensions UK, “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.” Alexander emphasized that scale can bring significant benefits but must be managed carefully to avoid disrupting the market and to ensure providers have the necessary certainty to plan and invest.

Alexander further noted that uncertainty is influencing the selection of schemes by providers, regardless of their performance, governance, or growth potential. Pensions UK is advocating for rules that acknowledge how pension assets are managed in practice, recognizing that scale benefits can be achieved through shared strategies, investment teams, and governance, regardless of the legal structure. As Alexander stated, “Scale and innovation must reinforce one another.” The trade body believes that any new rules should prioritize delivering better outcomes for savers rather than solely focusing on achieving scale.

Pensions UK has also emphasized the importance of flexibility in the management of pension schemes, allowing them to adapt to the needs of savers in retirement. The association’s statement on the scale proposals shows the need for a framework that supports innovation and reflects the practical management of pension assets. Alexander reiterated that “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.”

Lobbying against levy increases

Pensions UK is calling for a thorough examination of the general levy, following the government’s proposal to increase charges for all scheme types starting from 2027. The general levy, which funds the work of the Pensions Regulator, the Money and Pensions Service, and the Pensions Ombudsman, has been operating at a deficit and is set to increase. However, Pensions UK argues that the proposed increases do not account for the evolving nature of the pensions market and would impose significant additional costs on schemes and providers already handling substantial regulatory reforms.

Between 2018-19 and 2025-26, the income from the general levy more than doubled, from $43.5m to £98.4m. Pensions UK is seeking a full review of the levy framework to assess what it funds, how costs are allocated, and whether the system delivers value for money. The trade body also advocates for a temporary cap on levy payments during the review period. Julian Mund, Pensions UK’s chief executive, emphasized that the pensions market has undergone significant changes, particularly with the growth of defined contribution saving and master trusts, yet the levy framework has not undergone a full structural review.

Mund argued that the government should not make significant changes to the levy structure without first addressing fundamental questions about the levy’s purpose, cost allocation, and value for money. He stressed that the cost-raising mechanism must be fair, transparent, and proportionate. Master trusts, which cater to many members with small pots, are among those facing the steepest increases due to the per-member charging method. Pensions UK contends that higher regulatory costs will disproportionately affect these members and make it more expensive to consolidate smaller schemes, contrary to the government’s consolidation goals.

A higher levy could also have unintended consequences for schemes subject to the incoming Value for Money framework, potentially leading to higher costs regardless of efficiency or governance quality. Pensions UK might draw confidence from its successful lobbying for the abolition of the administration levy paid to the Pension Protection Fund. The trade body is urging the government to reconsider the levy increases and instead focus on creating a fair and sustainable funding mechanism for the pensions industry.

Refining surplus release rules

Pensions UK has submitted its response to the surplus flexibilities consultation, which aims to grant defined benefit trustees greater powers to make payments to employers and members of well-funded schemes. The association expressed support for the reforms, with over two-thirds of its members agreeing that the draft rules strike a good balance between safeguards and flexibility. However, Pensions UK identified areas requiring refinement and clarification, including the need for clear guidelines on the low dependency funding threshold and flexibility in sourcing advice on surplus release.

Tiffany Tsang, head of DB, investment, and the LGPS at Pensions UK, noted that improved funding across the defined benefit sector presents an opportunity to rethink how surplus can be utilized. Tsang emphasized that surplus should never be treated as automatically available or distributable, and member security must remain vital. Trustees need the ability to consider a scheme’s long-term funding and investment strategy, the strength of the employer covenant, and potential risks. Pensions UK is advocating for regulations that provide a clear and workable framework, preserving trustee judgment and allowing for proportionate advice and phased surplus release.

Tsang stated that “Improved funding across the DB sector creates an important opportunity to think differently about how surplus can be used. Done well, greater flexibility could support better outcomes for members, give employers and trustees more confidence to run schemes on, and allow well-funded schemes to make decisions that reflect their own circumstances.”