Key Takeaways
- • The UK government confirmed in its Final Report of the Pensions Investment Review that it will proceed with DC pension "megafunds", requiring contract-based and multi-employer DC master trust schemes used for automatic enrolment to have at least one default arrangement with £25 billion in AUM by 2030, with a transition pathway for schemes that can demonstrate £10 billion by 2030 and a credible plan to reach £25 billion by 2035.
- • The Pension Schemes Bill will introduce a contractual override allowing providers of contract-based schemes to transfer members without consent, permitted only where certified as in members' best interests by an independent expert, with detailed rules to be consulted on by the FCA.
- • Schemes that fail to reach the scale requirements or access the transition pathway will lose the ability to take part in the automatic enrolment market and will be expected to consider wind-up or consolidation.
- • The government dropped proposed mandated asset allocation and a proposed employer duty on value, opting instead to rely on the Mansion House Accord, under which 17 large providers committed to allocating at least 10% of DC default funds to private markets by 2030, including at least 5% to UK private markets, while retaining a power to mandate investment if needed.
- • A 2029 ministerial-led review will test whether default arrangements remain outside main scale arrangements, with a legislative underpin to address any remaining fragmentation.
Summary
The UK government has published the Final Report of its Pensions Investment Review together with its response to the consultation on unlocking the UK pensions market for growth, confirming that it will proceed with plans for pension "megafunds". According to the analysis by Mayer Brown, rumoured plans to mandate a minimum level of investment by schemes in certain UK asset classes have not materialised for now.
The forthcoming Pension Schemes Bill will require contract-based workplace pension schemes and multi-employer DC trust-based schemes used for automatic enrolment to have at least one "main scale default arrangement" with £25 billion in AUM by 2030. Smaller schemes may use a transition pathway if they can show a default arrangement of at least £10 billion by 2030 and provide their regulator, the FCA for contract-based schemes or the Pensions Regulator (TPR) for trust-based schemes, with a credible plan to reach £25 billion by 2035. Schemes must also demonstrate commensurate investment capability, including suitably qualified in-house expertise and strong governance. New default arrangements will generally be barred absent regulatory approval, although the government has not capped the number of default arrangements a scheme may run. A "new entrant" pathway will allow innovative providers offering something significantly different to seek authorisation. The requirements do not extend to DB schemes, single-employer DC trust schemes, CDC schemes, certain hybrid schemes, or default arrangements serving protected characteristics such as religion. Counsel's reading of the references suggests scope will be limited to DC master trusts rather than all non-associated multi-employer DC trust schemes.
To address fragmentation, the bill will introduce a contractual override allowing providers of contract-based schemes to transfer members without consent, where an independent expert certifies it is in members' best interests. Trust-based schemes already have a without-consent transfer option. The government expects this override and a new value for money (VFM) framework to reduce fragmentation and poor-value arrangements, but a ministerial-led review involving the FCA and TPR in 2029 will examine continued operation of default arrangements outside main scale arrangements. That review will presume consolidation unless evidence shows it would not benefit members, and the government plans a legislative underpin to tackle remaining fragmentation if required.
On cost versus value, the government has decided not to proceed with proposals for a new employer duty to consider the overall value of automatic enrolment schemes, citing limited evidence of effectiveness and concerns about burdens and costs on employers. On investment, the government believes broader DC allocation to private markets, particularly in the UK, will benefit members and the economy. Seventeen of the UK's largest workplace pension providers signed the Mansion House Accord earlier this month, committing, subject to fiduciary duties and the FCA's Consumer Duty, to allocate at least 10% of DC default funds to private markets by 2030, with at least 5% of the total in UK private markets, assuming sufficient investable supply. Given this, the government has not mandated asset class investment, but the bill will include a power to do so if industry fails to deliver, subject to impact assessment and fiduciary safeguards. TPR and the FCA will also run an annual market-wide data collection on asset allocation, starting later this year, until VFM disclosures begin in 2028. Phase 2 of the pensions review, on retirement adequacy, will launch in the coming months.
Mayer Brown notes that the reforms will not take effect for some years, but providers of contract-based schemes and trustees of in-scope master trusts should begin planning once the Pension Schemes Bill is published. The government has also published further proposals to ease release of surplus from ongoing DB schemes.
The forthcoming Pension Schemes Bill will require contract-based workplace pension schemes and multi-employer DC trust-based schemes used for automatic enrolment to have at least one "main scale default arrangement" with £25 billion in AUM by 2030. Smaller schemes may use a transition pathway if they can show a default arrangement of at least £10 billion by 2030 and provide their regulator, the FCA for contract-based schemes or the Pensions Regulator (TPR) for trust-based schemes, with a credible plan to reach £25 billion by 2035. Schemes must also demonstrate commensurate investment capability, including suitably qualified in-house expertise and strong governance. New default arrangements will generally be barred absent regulatory approval, although the government has not capped the number of default arrangements a scheme may run. A "new entrant" pathway will allow innovative providers offering something significantly different to seek authorisation. The requirements do not extend to DB schemes, single-employer DC trust schemes, CDC schemes, certain hybrid schemes, or default arrangements serving protected characteristics such as religion. Counsel's reading of the references suggests scope will be limited to DC master trusts rather than all non-associated multi-employer DC trust schemes.
To address fragmentation, the bill will introduce a contractual override allowing providers of contract-based schemes to transfer members without consent, where an independent expert certifies it is in members' best interests. Trust-based schemes already have a without-consent transfer option. The government expects this override and a new value for money (VFM) framework to reduce fragmentation and poor-value arrangements, but a ministerial-led review involving the FCA and TPR in 2029 will examine continued operation of default arrangements outside main scale arrangements. That review will presume consolidation unless evidence shows it would not benefit members, and the government plans a legislative underpin to tackle remaining fragmentation if required.
On cost versus value, the government has decided not to proceed with proposals for a new employer duty to consider the overall value of automatic enrolment schemes, citing limited evidence of effectiveness and concerns about burdens and costs on employers. On investment, the government believes broader DC allocation to private markets, particularly in the UK, will benefit members and the economy. Seventeen of the UK's largest workplace pension providers signed the Mansion House Accord earlier this month, committing, subject to fiduciary duties and the FCA's Consumer Duty, to allocate at least 10% of DC default funds to private markets by 2030, with at least 5% of the total in UK private markets, assuming sufficient investable supply. Given this, the government has not mandated asset class investment, but the bill will include a power to do so if industry fails to deliver, subject to impact assessment and fiduciary safeguards. TPR and the FCA will also run an annual market-wide data collection on asset allocation, starting later this year, until VFM disclosures begin in 2028. Phase 2 of the pensions review, on retirement adequacy, will launch in the coming months.
Mayer Brown notes that the reforms will not take effect for some years, but providers of contract-based schemes and trustees of in-scope master trusts should begin planning once the Pension Schemes Bill is published. The government has also published further proposals to ease release of surplus from ongoing DB schemes.
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