HL UK Pensions Law Digest 6 May 2025

Welcome to our latest update, in which we cover:

• Pensions Regulator (TPR): Market volatility
  • TPR sets out some practical steps trustees should consider to manage investment risk and opportunities in light of geopolitical and market uncertainty.
• Pensions Regulator (TPR): Annual Funding Statement 2025
  • TPR has issued its first Annual Funding Statement since the new funding code of practice and updated covenant guidance came into force.
• Work and Pensions Committee (WPC): Government Response
  • The WPC has published the DWP’s response to the WPC’s recommendations for defined benefit (DB) schemes.
• Collective defined contribution (CDC) arrangements: regulations expected
  • Regulations to enable CDC arrangements to be set up for unconnected employers are expected this Autumn.
• Pensions Regulator (TPR): delivery of notices 
  • Some points of wider interest regarding the service of notices, in a decision from the First-tier Tribunal concerning breach of auto-enrolment duties;

Pensions Regulator: Market volatility

The Pensions Regulator (TPR) has issued a statement on Market volatility in the light of recent trade and geopolitical tensions and concerns about interest rates, inflation and global growth.

The statement reflects TPR’s increased focus on investments; highlights risks which trustees should be aware of; and sets out practical steps for trustees to manage those risks.

TPR has identified five key areas of focus for defined benefit (DB) schemes and three key areas for defined contribution (DC) schemes.

DB best practice 1: Scheme liquidity and cashflow management

Trustees should ensure that short-term liquidity and cashflow requirements are met so that they can focus on their longer-term investment strategy. This may involve assessing and monitoring:

• Liquidity buffers under liability-driven investment (LDI) mandates;
• Cashflow needs arising from currency hedging;
• Changes in member behaviour (such as early retirements and transfers) that could increase cash demands; and
• The impact on cashflow of any delays in payment of deficit repair contributions.

DB best practice 2: Investment strategy and risk management

Trustees should engage with their investment consultants and investment managers to ensure that the scheme’s investment strategy remains appropriate. This may involve reviewing:

• Whether current rebalancing arrangements should be reduced, to limit the risk and cost of excessive trades;
• Diversification and concentration of risks;
• The timing of any previously-agreed transitions or triggers; and
• Investment strategy and allocation in light of longer term tariff policies.

DB best practice 3: Governance and operational resilience

Trustees should ensure that they can respond quickly enough to short-term market developments. This may include checking:

•  Terms of reference and delegated authority for sub-committees;
• That authorised signatory lists are up to date; and
• Whether current investment and risk governance is sufficiently flexible to allow quick responses to market changes.

DB best practice 4: Covenant and employer considerations

Trustees of schemes reliant on the employer covenant should understand the impact of market volatility on the employer’s ability to support the scheme. Trustees should consider:

• The short and long term impact on the employer’s business, including the effect on key suppliers and customers;
• The impact on the employer’s finances and how this may affect its ability to support the scheme, especially where deficit repair contributions (DRCs) are material;
• Any known future events such as a deadline for refinancing employer debt;
• Seeking an information-sharing protocol and access to senior personnel where the employer is materially exposed to market volatility;
• The availability of any contingent assets to mitigate a weakening of the employer covenant; and
• Investment and risk management action where concerns are material.

DB best practice 5: Opportunities and funding level changes

Not all of TPR’s recommendations are gloomy. Where a scheme is on a derisking journey, trustees should be prepared to take advantage of any opportunities, including by:

• Reappraising risk transfer / derisking policies if funding levels improve;
• Considering how future relaxation on the use of surplus may impact risk transfer / derisking policies; and
• Being prepared to take advantage of investment opportunities which may arise.

DC best practice 1: Member communications to help members make informed decisions

Trustees should understand their membership and how different cohorts are affected by market movements. TPR is concerned that market downturns may result in members crystallising losses or opting out of pension saving. Trustees may seek to:

• Monitor changes in member activity, such as switching to cash funds and withdrawals;
• Provide guidance about the implications of current market conditions across different retirement timelines;
• Encourage members to seek advice and guidance before switching funds; and
• Remind members to be aware of scams.

DC best practice 2: Investment and risk management

Trustees should monitor risks and consider reviewing their investment strategy. This may involve considering:

• Suspending or refining current rebalancing arrangements, to limit the risk and cost of excessive trades;
• Diversification and concentration of risk;
• Whether planned activities such as bulk transfers or switching funds remain appropriate.

DC best practice 3: Strategic oversight

Trustees may wish to develop their investment strategy and governance arrangements at an appropriate time, to identify strategies for preserving value and to take advantage of investment opportunities.

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Pensions Regulator (TPR): Annual Funding Statement 2025

On 29 April, the Pensions Regulator (TPR) issued its Annual Funding Statement 2025, the first issued since its new defined benefit (DB) Funding Code and updated covenant guidance came into force towards the end of last year.

The Statement is particularly aimed at schemes with valuation dates between 22 September 2024 and 21 September 2025, but information regarding the new code and covenant guidance is relevant to all DB schemes.

Key points to note include:

• Positive news on scheme funding, with 85% of schemes estimated to be in surplus on a technical provisions basis as at 31 December 2024, and 54% of schemes having a surplus on a buyout basis;
• TPR expects that most schemes will shift their focus from deficit recovery to endgame planning;
• TPR plans to issue guidance on DB endgame planning in “early Summer” (TPR’s recent blog on its innovation hub stated that this guidance would be issued this May);
• The need to monitor the impact of trade and geopolitical uncertainty on scheme funding and the employer covenant (for more details please see our entry on TPR’s statement on market volatility);
• Around 80% of schemes are expected to meet the Fast Track valuation criteria (although some trustees may prefer the greater flexibility available under the Bespoke valuation route); and
• TPR considers it good practice for trustees to adopt a scheme-specific policy on release of surplus. While details of the government’s plans for using surplus have yet to be announced, trustees may start thinking now about how to approach any employer requests for surplus release.

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Defined benefit (DB) schemes: Response to Work and Pensions Committee

The House of Commons Work and Pensions Committee (WPC) has published the DWP’s Response to a Report issued by the WPC in March last year, which made numerous recommendations for the future of defined benefit (DB) schemes.

Much of the DWP’s Response reiterates policy decisions already announced by the new government since the general election last July. Points worth noting include the following.

Surplus

• The Response confirms the intention to enable well-funded pension schemes to share surplus with sponsoring employers and members, while emphasising that benefit security is paramount.
• The DWP will respond formally to its earlier consultation on Options for DB schemes, “in the Spring”.

Pension Protection Fund (PPF)

• The DWP is continuing to explore whether a government consolidator, operated by the PPF, could be an option for schemes which are less attractive to commercial consolidators.
• The DWP and the PPF will consider the PPF compensation framework, especially increases on pre-1997 pensions. The DWP recognises the hardship caused by the lack of inflation protection but points out that PPF assets and liabilities are reflected in government accounts – meaning that improving compensation could have a significant impact on public finances.
• The DWP will consider giving the PPF greater flexibility to reduce the PPF levy when it is not required.
• The PPF has welcomed the DWP’s response.

Buy-outs

• The Pensions Regulator (TPR), government and other regulators are working together to manage any systemic risk arising from pension schemes transitioning to the insurance market.

Trustee capability and governance

• The DWP will consult later this year on improving scheme governance, including on:
  • an accreditation framework;
  • any further safeguards needed in relation to sole trustees; and
  • supporting lay trustees.
• When TPR’s trustee register is fully developed, it should be able to publish anonymised data on trusteeship, including the numbers of:
  • schemes which have a professional trustee; an accredited trustee; or no accredited trustee; and
  • trustees who have completed the trustee toolkit.

Retirement adequacy

• The second phase of the government’s Pensions Review will explore longer term challenges, including retirement adequacy. The government will set out the full scope and timetable for the second phase in due course.

DB funding

• The DWP will monitor the effectiveness of the new DB Funding Code, including how schemes’ funding and investment strategies evolve in response to the Code and new legislative requirements.
• The 2024 regulations (SI 2024/462), which set out the detailed requirements for a scheme’s funding and investment strategy and its statement of strategy, will be reviewed within the next five years.

Discretionary increases

• The impact of inflation on pensions, especially on non-increasing pre-1997 benefits, continues to be a concern. The DWP plans to work with TPR to understand why schemes are not making discretionary increases to pre-1997 benefits.
• The government’s future surplus reforms will make it easier for schemes to reach decisions which benefit both employers and members, including through discretionary increases.

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Collective defined contribution (CDC) schemes: regulations in Autumn 2025

• The government has confirmed that it will introduce regulations in Autumn 2025 to allow collective defined contribution (CDC) arrangements for multiple unconnected employers. Legislation and an updated Code from the Pensions Regulator (TPR) will be brought into force as soon as possible.
• As a reminder, CDC arrangements pool investment and longevity risks and aim to provide a target income for life. However, unlike defined benefit (DB) arrangements, the target income is not guaranteed and employers are not liable to pay additional contributions should the targeted benefits prove unaffordable.
• The government anticipates that CDC arrangements could provide better levels of income replacement than annuities, while enabling investment in illiquid and productive long-term assets to support UK growth.

Decumulation only CDC arrangements

• The government will continue to work with the pensions industry to progress the development of decumulation only CDC arrangements, to enable individuals with defined contribution (DC) pots to access CDC benefits as a retirement option.

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Receipt of notices from the Pensions Regulator (TPR)

In a recent decision concerning failure to comply with auto-enrolment duties (JM Kamau Limited v The Pensions Regulator), the First-tier Tribunal (FTT) found that notices from the Pensions Regulator (TPR) had been received by the recipient employer, regardless of whether the appropriate individual had actually seen them.

The FTT also made a ruling about evidence of TPR’s processes, which is of relevance to any future similar cases.

Background

JM Kamau Limited (JMK) failed to comply with certain auto-enrolment requirements and was sent a breach compliance notice, a fixed penalty notice and a subsequent escalating penalty notice by TPR.

Mr M, a director of JMK, argued that:

• TPR had not issued the notices; and
• Alternatively, that he had not received the notices.

Did TPR issue the notices? Evidence required

TPR gave detailed evidence of its processes for issuing and recording notices relating to auto-enrolment duties, including the use of external contractors.

Of wider application, the FTT held that:

• In future cases before the FTT, TPR may rely on the evidence given in the JMK case as to its systems for issuing auto-enrolment notices. In other words, further witness evidence will not be needed, unless it is specifically directed in a particular case.
• In future cases, TPR may be expected to provide screenshots from its IT system relating to the particular appellant.
• Screenshots confirming that the notice in question was issued to the proper address, combined with the general evidence of TPR’s systems, are likely to be enough for TPR to discharge the burden of demonstrating that the notice was issued. However, each case will need to be determined on its own facts.

In JMK’s case, TPR screenshots and other evidence clearly recorded that the three notices were sent to JMK at its registered address.

As a matter of law, did Mr M receive the notices?

What mattered for this case was whether Mr M (on behalf of JMK) had received the notices as a matter of law, not whether he had in fact received them.

The relevant legislation contains a presumption that a notice issued by TPR and posted to a person’s last known address is actually received by that person. However, this presumption may be rebutted in a particular case.

Mr M argued that Royal Mail had misdelivered TPR’s notices, and he and other witnesses gave evidence of some post addressed to “Bluebell Way” being delivered to the equivalent property number in “Bluebell Park”. However, this evidence was general in nature and of limited scale – so was insufficient to make out that all three notices from TPR had been misdelivered.

Did Mr M actually see the notices?

JMK’s registered office was a residential address. Mr M explained that following the breakup of his relationship with his partner he was not allowed to return to this address or to pick up his belongings. His partner gave evidence that she had opened some post addressed to Mr M and had thrown it away, although it was unclear whether this included TPR’s notices or related instead to parking fines.

In JMK, Mr M did not argue that TPR’s notices had been correctly delivered to his former address but had not been seen by him as he was not living there at the time and his post was not passed on. However, given the question’s wider relevance, the FTT considered whether the presumption of service could be rebutted if the notices were delivered to the correct address but not seen by the correct person.

What if the notices were correctly delivered but not seen by the correct person?

The FTT recognised that in a number of scenarios a notice could be delivered to the correct address but not seen by the correct person – for example, in a shared occupancy dwelling with a single letter box, or in a serviced building with a central address for post.

The FTT considered the relevant legislation and caselaw and concluded that service of a notice requires delivery to the proper address but does not require any collaboration by the intended recipient. The system could not sensibly function if a recipient could avoid delivery of a notice by simply choosing not to pick up mail.

Conclusion in JMK’s case

The FTT would only have jurisdiction to consider JMK’s appeals against TPR’s notices if either:

• TPR had completed a review of the notice; or
• JMK had applied for a review of the notice in accordance with legislation and TPR had declined to carry out a review.

In JMK’s case, neither condition applied: TPR had not carried out a review, nor had JMK applied for a review in accordance with the timescales in the legislation.

It followed that the FTT did not have jurisdiction to hear JMK’s appeal and it was bound to strike out the proceedings.

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Authored by Jill Clucas.