Pensions Essentials - April 2025

TPR has said that it intends to increase its engagement with and oversight of professional trustee firms.  As part of this process, it has issued a market oversight report which gathers together research on the professional trustee market from a number of sources. The report says that around half of UK pension schemes have a professional or sole trustee, with appointments of sole trustees growing.  Professional trustee firms have assets under management of over £1 trillion, with around £75 billion managed by sole trustees.

The report identifies areas where TPR considers that the growth in professional trustees might pose a risk to members and which it intends to consider further.  These include:

• Relationship with employer: How professional trustee firms manage relationships with employers and the need to ensure that trustees remain independent.
• Profit and remuneration model: Whether commercial factors could affect trustee decision-making, and whether there is any risk that services could be compromised to reduce costs (for example, if some schemes are prioritised over others).
• Sole trusteeship: Why schemes appoint sole trustees (for example, whether it may be driven by cost), and what internal controls sole trustees operate once appointed.
• In-house advisers: If the presence of in-house advisers could lead to compromised decision-making or advice (for example, whether there is a reluctance to properly scrutinise advice from, or to pursue errors by, in-house advisers), and whether there could be issues with indemnity insurance and conflicts of interest.
• Decision making: Who makes daily decisions on behalf of schemes, what level of knowledge and understanding they have of pension scheme governance, and whether delegations are always appropriate.

TPR intends to engage with professional trustee firms over the course of 2025 and assess these risks in greater detail.  It will then make its expectations clear, and work with the industry to identify appropriate mitigations. Where material risks are identified and action is not taken, TPR might then consider how to make use of its powers (for example, its powers of appointment and removal). 

TPR also intends to highlight good practice which it hopes will help to inform employers and trustees when choosing professional trustees.

Survey of DC schemes: The survey contacted 215 DC schemes of a variety of different sizes and types, from master trusts to micro schemes with fewer than 12 members. The key findings included:

• Cybersecurity: 70% of schemes had a cyber-security incident response plan. However, 54% relied on the plan of a third-party such as the employer, and 33% of these had not sought assurances that this was appropriate. A significant number of schemes had not reviewed cyber risks and controls in the last year, and less than half of trustees had received regular training. This is particularly concerning given recent press reports about a number of concerted attacks on large Australian pension funds.  
• Investment in UK productive finance: 22% of schemes held UK investments such as infrastructure and private equity but only 10% planned to increase this in the next year. 28% of schemes reported barriers to investing more in UK assets, which typically related to scheme size or circumstances (e.g. planning to wind up) or the trustees not making investments (e.g. because an insurer did). Over half of master trusts highlighted fiduciary duties as a barrier. It will be interesting to see if the upcoming Pension Schemes Bill addresses any of these perceived issues.
• General code of practice: Awareness was of the Code was at 47%. However, only 28% described themselves as ‘very’ or ‘fairly’ familiar with it. Both awareness and familiarity increased among larger schemes and among professional trustees. The length and complexity of the Code means that these figures are not a surprise, but they may be of concern to TPR and further drive its consolidation agenda.
• Climate risks: Less than a fifth of schemes had dedicated time or resources to assessing climate-related risks and opportunities, although the vast majority of larger schemes had done so. This has led to TPR issuing a press release saying trustees in smaller DC schemes should “upskill or consider consolidating in savers’ interests”.
• Dashboards: 87% of medium-sized schemes had discussed pensions dashboards at trustee meetings. This means that 13% had not, and given the longstop connection deadline of 31 October 2026 and the potentially earlier dates set out in DWP’s connection guidance, it would seem that some schemes could miss their connection deadline.
• Auto-enrolment: 52% of respondents were aware that the government intends to expand auto-enrolment by abolishing the lower earnings limit for contributions and reducing the qualifying age from 22 to 18 years old, both of which will potentially have costs for employers. However, it should be noted that there is currently no clear timescale for doing this, despite the fact that the relevant enabling legislation was enacted in 2023.

Value for members assessment: In 2021, new rules came into force requiring smaller DC schemes with assets of less than £100 million to complete a detailed assessment of value for members (VfM). The assessment must include a comparison of costs and charges and net investment returns against 3 other schemes, together with an assessment of various governance and administration criteria. The outcome of this detailed VfM assessment must be reported in the annual chair’s statement, published on a publicly accessible website, and reported to TPR via the scheme return.

Following concerns that some schemes were not complying with these requirements, TPR ran a campaign focussing on them in 2023 and 2024. Its recent compliance and enforcement bulletin shows that TPR has increased the use of its enforcement powers in this area, and has issued penalties to 19 schemes totalling £97,750. TPR says that: “Where trustees cannot compete with the best in the market, either in terms of value or governance, they should consider whether a transfer to a better-value scheme and winding up is what is best for their savers.”

In the week in which it celebrated its 20th birthday, the PPF launched its strategic plan for the next three years.

The backdrop for the strategic plan is that the PPF is currently in a position of strength, with £32 billion in assets under management and nearly 400,000 members. The current levy year has seen it significantly reduce the levy, to the point where legislation is now required to reduce it further. However, there are 5,000 remaining DB schemes, with nearly 9 million members and around £1 trillion in liabilities, and the PPF remains the ultimate backstop for these schemes.

The PPF has identified four key strategic goals for the next three years:

• Reducing costs for schemes: It proposes to work with government to reduce costs for schemes and employers by revising the legislation governing external funding, reflecting its current financial strength.
  
  This will include working on a framework that allows for a zero levy, but supports financial security by enabling the levy to be reintroduced if necessary. As we reported in Pensions Essentials in January, the PPF included a provision in its 2025/26 levy rules to allow it to calculate a zero levy if appropriate statutory changes were made during 2025/26. Changes are needed because existing legislation restricts the annual increases in the levy to 25% of the previous year’s levy. This was intended to protect levy payers from sharp increases, but it clearly restricts the way that the PPF can react to future developments if it reduces the levy significantly or to zero. Changes are likely to be made to this provision in the upcoming Pension Schemes Bill.
  
  The PPF also benefits from a separate administration levy, which is determined by a applying a statutory multiple to the number of members a scheme has. The PPF is considering changes to this levy in recognition of the fact that it is in a position to be self-funding.
• Dashboards: PPF and Financial Assistance Scheme compensation will not be within the initial scope of the dashboards. This clearly means that some members will not be provided with a full picture of their benefits, and the PPF says that it will work with government to enable compensation data to be available on the dashboards as soon as possible.
• Compensation: In March 2024, the Work and Pensions Select Committee recommended that the government should legislate to improve PPF compensation levels, and that the first improvement which should be considered was indexation of pre-April 1997 benefits. The Committee said that the failure to provide indexation on these benefits has “a disproportionate impact on women and older scheme members”. The PPF will work with the government to progress a review of indexation. It will be interesting to see where this ends up, as many members will not have been entitled to pre-1997 indexation in their original transferring schemes, and the PPF may not be able to identify in all instances whether this was the case or not.
• Fraud Compensation Fund (FCF): The FCF was set up under the Pensions Act 2004 and is operated by the PPF. In broad terms, it provides compensation where the assets of a scheme are reduced as a result of dishonesty and the employer is insolvent. Historically there were very few claims on the FCF but, as a result of a High Court case in 2020, some members of pension liberation schemes became entitled to compensation, and the PPF estimated that this could cost around £400 million. Now the PPF says that it plans to finalise all known applications to the FCF and work with DWP and TPR to determine whether any future claims are likely.