Pensions Essentials - May 2025

Successive governments have observed that the proliferation of small pots under the auto-enrolment regime has resulted in members losing track of some benefits and a disproportionate administration cost. The Government estimates that small pots cause annual industry-wide losses of up to £225m and result in a reduction in value for members. 

In 2023, a government response to consultation proposed that for the purposes of any future consolidation legislation, small pots would be those that:

• have been created since the introduction of auto-enrolment;
• are within auto-enrolment charge-capped default funds;
• have had no active contributions made for a period of at least 12 months; and
• are valued at £1,000 or less (although the pensions minister’s foreword to the recent report refers to this as a starting point, suggesting that the regime may be extended to apply to larger pots in the future).

The response to consultation also proposed that schemes would be required to transfer eligible small pots to one of multiple default commercial consolidators, with an opportunity for the member to choose their desired consolidator scheme. A central clearing house would be responsible for matching deferred pots and lead on communication with members and there would be an authorisation and supervisory regime for schemes acting as consolidators.

Legislation is expected in the Pension Schemes Bill (anticipated to be published in the next few months) to take these proposals forward. The report and the Government’s response to it provides more information about what it is likely to include – although detail is more likely to be in future regulations than the Bill:

• Infrastructure: There will be a small pots data platform (SPDP) which could be funded by the General Levy. Where schemes identify a pot to be consolidated, they will approach the SPDP who will be responsible for verification, matching members to existing pots with consolidators and facilitating the consolidation process. A decision has yet to be made on whether the SPDP should hold and maintain records as this will be considered as part of a Feasibility Review which should conclude in June 2025. The PLSA will lead a review into the design and implementation of the SPDP.
• Communications: In a departure from the original proposals, the SPDP will not be responsible for member communications – these will be the responsibility of the original and consolidator scheme. As part of the authorisation process, schemes will need to show evidence of high-quality communication and engagement with their current membership. It is proposed that there should be two standardised points of communication with members. The first when the pot has been identified as eligible for consolidation, and the second once the pot has been consolidated. These communications will need to come from the transferring scheme.
• Allocating members to a consolidator: Where members have chosen a consolidator, they will be transferred into that. If they have not made a choice, they will, where possible be transferred into a scheme where they already have a pot. If they have multiple pots with different consolidators, they will be allocated to the scheme which holds their largest pot. If they don’t have a pot with a consolidator, they will be allocated to one.
• Authorisation: It is envisaged that the consolidators will be existing master trusts. The delivery group recommended that they must meet the requirements for auto-enrolment and offer a sharia compliant fund, as well as having a specified level of scale to provide economies and tolerate loss making pots or a clear business plan showing that they will reach that scale within 3 years. They will also need to demonstrate that they are providing good levels of value for members and provide protection from flat fees. The legislation will allow for the possibility of GPPs as consolidators but there appears to be limited appetite for this at the moment.
• Transfers: The delivery group recommends that a 12-month time limit would be sufficient to transfer out small pots. It is not clear when this period would run from or whether there will be a longer initial transitional period to transfer out accumulated small pots.
• Liability: A liability framework will be needed to ensure that members are protected if errors are made and that they can be put back into the position they would have been had everything been done correctly during the consolidation process. The liability of ceding and receiving schemes is dealt with under the existing law. If the SPDP is responsible for an error, an alternative funding mechanism will need to be established. It is also proposed that the General Levy will be the funder of last resort where a scheme that is found to be at fault for an error no longer exists in the market.

The intention is that regulations will be drafted during 2026 with elements of the legislation expected to come into force during 2027/2028. Duties on pension schemes to transfer and consolidate eligible pots are likely to come into force from 2030 with a phased approach to implementation.

For more insight on these proposals, see the recent blog by Patricia Critchley in our pensions team.

TPR estimates that at the end of 2024, approximately 40% of DB schemes could potentially have met the primary tests to consider whether a superfund transfer was in members' interests and of those, around 1,400 had less than £100 million assets. It says that: “Smaller schemes are more likely to particularly benefit from improved governance and access to investment and risk management opportunities that may otherwise be out of reach, as well as economies of scale in running costs”. However, TPR is aware that the superfund market needs scale to take on small schemes and hopes the upcoming Pensions Schemes Bill will provide appropriate incentives for the market to expand.

In the meantime, it has issued a blog setting out its top tips for schemes considering transfers to a superfund. Based on its experience to date (which consists of 3 transfers to Clara of over 20,000 members and assets of around £1.5 billion), it has identified some friction points in superfund transfers: 

• Gateway tests: There are 3 gateway tests a scheme must satisfy before TPR will clear a transfer to a superfund.
  
  The first is that the scheme cannot access buy-out now. TPR says that the scheme does not need to obtain a buy-out quote from an insurer to demonstrate this, an objective estimate of the cost of executing a buyout from an actuary with experience of the market will suffice.
  
  The second test is that the scheme has no realistic prospect of buy-out in the foreseeable future, given potential employer contributions and insolvency risk. TPR says that a strong rationale for the transfer is vital where the scheme has ongoing employer support, but clearance is possible in these circumstances.
  
  The third test is that a transfer to the chosen superfund will improve the likelihood of members receiving full benefits.  TPR recognises that this is a matter of judgement, particularly where a key factor is the ability of the employer to support the scheme outside the superfund. It does not necessarily expect mathematical quantification of likelihoods.
• Due diligence: Trustees need to demonstrate that they have done appropriate due diligence in relation to a superfund transfer. However, TPR says that it will have scrutinised the legal and governance structure, systems and processes and key people of all superfunds listed on its website and would not be concerned if trustees carried out minimal due diligence on these aspects.
  
  Schemes will need to provide a comprehensive rationale for transferring, including supporting advice and evidence. This should set out why transferring is in members’ interests and the pros and cons of doing so.  TPR urges schemes to be transparent and says that rarely will there be no cons.
• Bulk transfer terms: The terms of a transfer, including cash injections from the employer and superfund, are often struck based on the financial position of the scheme months before the date of transfer. As such, certain “boundary conditions” are agreed which will trigger a reassessment.  TPR says that assessing boundary conditions right up to the date of transfer is impracticable and there comes a time when all parties must commit. It would be unlikely to be concerned if boundary conditions terminate on the date members are notified of the pending transfer.

TPR also says that new guidance on DB Endgame Options, which it is planning to publish soon, will explore the wider range of options available in 2025 for DB schemes.

Surplus: In a recent press release, the Government confirmed that the upcoming Pension Schemes Bill (expected before summer) will contain provisions to facilitate the release of surplus in ongoing schemes. It says that the changes will “allow Pension trustees and the sponsoring employers to safely release some surplus to invest back into their businesses and unlock more money for pension scheme members… [and] will focus on member protection, and trustees will continue to be required to fulfil their duties towards scheme beneficiaries”. 

Just as this edition of Pensions Essentials was going to press, the Government issued its response to consultation on Options for DB Schemes. This sets out its proposals in relation to release of surpluses which include a statutory power for trustees to modify scheme rules to provide for surplus sharing and possible amendments to the threshold at which surplus can be refunded to an employer from buyout to full funding on the low dependency funding basis.  The response says that the Government does not intend to mandate how extracted surplus must be used.  More detail about these proposals will be set out in an upcoming briefing.

PPF: The response to consultation on Options for DB schemes says that the Government is continuing to consider the possibily of using the PPF as a public consolidator and what that would look like.

In addition, the Government says it has heard requests to review the level of compensation paid by the PPF, specifically in relation to the award of pre 1997 indexation but that: “Any change in this area has significant implications on public finances… Assets and liabilities for the PPF are reflected within the Government accounts, and any use of the PPF reserve and increases in future liabilities have an impact on the public finances… we will need to work through the issues to ensure a balance can be struck between all parties, including the interests of members of failed schemes, the levy payers who support the PPF and taxpayers”. So, it remains far from clear what, if any, developments there will be in this area. 

Transfers: The pensions minister has confirmed in response to a written parliamentary question, that DWP is working with regulatory bodies and the industry to consider how the transfer process can be improved for members. 

This follows industry concerns that the transfer conditions introduced in 2021 to combat scams, including a requirement for some members to seek guidance from Money Helper, is unnecessarily delaying transfers. However, as it has been clear since the conditions were launched that some of them were problematic it seems unlikely that changes in this area are considered a priority issue. 

Trusteeship: In relation to the growth in sole trusteeships, the Government’s response to the recommendations from the Work and Pensions Committee says that in its view, there are already significant safeguards in place in the form of TPR’s powers to remove and replace trustees or add an independent trustee where there are concerns about existing trustees’ capability or behaviour. It also notes that TPR has said it is extending its oversight of professional trustees.

However, Government has said it will consult on trusteeship later this year and the consultation will cover a framework for accreditation and governance of trustees and consider what further action might be needed to protect members as the trustee landscape continues to change. It will also consider how TPR and DWP can support lay trustees (including member-nominated trustees) where they need it. 

There is also confirmation that TPR continues to work on its trustee register and a suggestion that TPR might in some way be able to monitor usage of the Trustee Toolkit to develop a “clearer view of areas… where support and intervention may be required.”

Notifiable events: The Pension Schemes Act 2021 contains provisions which, if enacted, would require employers and entities connected or associated with them to give notice to TPR of a decision in principle to sell a material proportion of the employer’s assets or to grant or extend security over its assets. DWP consulted on regulations in 2021 which set out more detail about how these new notifiable events would operate. However, neither the provisions of the Act or the draft regulations have ever been brought into force and there has been no update from the Government for some time in relation to them.   

The FCA published a regulatory initiatives grid which is intended to set out the regulatory pipeline so that industry can understand the timing of initiatives that may have a significant operational impact. TPR’s work on updates to its notifiable events code of practice to reflect the changes in the Pensions Schemes Act is listed in the grid under “initiatives that have been completed or stopped”, suggesting that no more work is being done on it at the moment. 

Whilst this is not conclusive evidence that the notifiable events changes will not be brought into force, it is the clearest indication we have had of that so far.