Key legal issues in 2025 for UK pensions: Our insights

This article covers, in particular:

• Virgin Media: the legal rollercoaster continues … 
• The Pension Schemes Bill: a comprehensive overhaul
• Pensions dashboards: the countdown begins
• Government's Pension Review: driving growth and consolidation
• Investment review and automatic enrolment: delays and adjustments
• Inheritance tax changes: navigating new proposals

Virgin Media: the legal rollercoaster continues …

The ongoing saga of Virgin Media's impact continues to be a significant concern for former contracted-out pension schemes. The crux of the issue lies in the requirement for written confirmation (“section 37 confirmation”) from the scheme actuary that the contracting-out reference scheme test would continue to be met following amendments to the scheme. Without this confirmation, any changes to the scheme may be invalid.

Upcoming court case:  The High Court is set to hear a potentially important new case in Q1 2025, focusing on several critical questions related to section 37 confirmations. Key issues include:

• What constitutes a written confirmation from the actuary? Could it be a report or a letter of advice given before the deed of amendment was made?
• Whether certain specific amendments required a section 37 confirmation?
• Would the actuary’s triennial certificate that a scheme continued to meet the contracting-out requirements count for section 37 purposes if obtained after the deed of amendment was made?
• Can the court infer that written confirmation was given at the time of an amendment if no evidence is found either way, based on the presumption of regularity?

Legislative solution:  There is hope that ongoing discussions with the Department for Work and Pensions (DWP) might lead to a legislative solution to validate past amendments.    It is likely, however, that the DWP may wait for the outcome of the new court case before deciding whether legislative change is needed.

The Pension Schemes Bill: a comprehensive overhaul

The anticipated Pension Schemes Bill, expected before the end of June 2025, promises significant changes across various aspects of the pensions landscape:

Likely key provisions:

• Consolidation of defined contribution (DC) deferred small pots:   automatically consolidating deferred members’ micro-pots to reduce the administrative burden and to help individuals build up a meaningful fund.
• Value for Money (VFM) framework:  Introducing a red, amber, green framework for trust based DC schemes to evaluate their performance, shifting the focus from cost to value.
• Retirement income solutions:  Mandating trustees of DC arrangements to provide default retirement income solutions, meaning that members are not forced to make their own choices on how to use their pension pot on retirement.   
• Pensions Ombudsman as a competent court:  Empowering the Ombudsman to issue directions for schemes to recover overpayments without the need to seek an order from the County Court. 
• Defined benefit (DB) schemes:  introducing an authorisation regime for DB superfunds to drive DB consolidation; plus measures to ease restrictions on the use of DB surpluses. 

Pensions dashboards: the countdown begins

After years of anticipation, pensions dashboards are set to become a reality in 2025. The statutory deadline for all schemes to connect to the dashboards architecture is 31October 2026, but the DWP has issued guidance for a staged timetable, aiming to help manage capacity:

Connection timetable:

• April 2025:  Master trusts with over 20,000 members.
• November 2025:  Other money purchase schemes and hybrid schemes with over 1,000 members.
• 2026:  Remaining schemes.

Trustees must have regard to the staged timetable and to guidance from the DWP and Money and Pensions Service (MaPS) .

Government's Pension Review: driving growth and consolidation

The UK government's Pension Review aims to stimulate economic growth by encouraging pension funds to invest in UK products. A significant focus is on the consolidation of the defined contribution (DC) market.

Consultation document:  the consultation, which closed on 16 January 2025, highlights several key points:

• Market overview:  There are currently 1,000 DC schemes, 30 authorised Master Trusts, and about 30 providers of group personal pensions.
• Optimal fund size:  The optimal size for assets under management to deliver value for money is identified as £25-50 billion. This raises questions about the feasibility of setting a minimum size for default funds, as few funds currently meet this threshold.

Challenges for new entrants:  Industry commentators highlight that setting a high minimum size could deter new entrants from disrupting the market. Employers may hesitate to nominate providers that might not reach critical mass within a few years, leading to potential market exits.

Transfers without consent:  The review also considers introducing the power to transfer without consent from contract-based schemes, aligning them with trust-based schemes. This change, with appropriate safeguards, could streamline the transfer process and enhance market efficiency.

Investment review and automatic enrolment: delays and adjustments

The second phase of the investment review has faced delays, partly due to considerations around increasing automatic enrolment contributions and expanding coverage by lowering the age and changing earnings triggers. The government is cautious about imposing additional obligations on employers at this time.

Inheritance tax changes: navigating new proposals

The government's proposals to amend inheritance tax legislation has sparked significant discussion. The changes aim to charge inheritance tax on unused pension funds and lump sum death benefits paid out of pension funds.

Key Points:

• Unused pension funds:  Closing the loophole on unused pension funds was anticipated.
• Discretionary death benefits:  More surprising is the proposal to tax discretionary death benefits, which are currently outside an individual’s estate on death and exempt from inheritance tax.
• Insured benefits:  clarification is needed on whether benefits from group life assurance policies held under registered pension schemes fall within the scope of the proposals.

Practical challenges:  Schemes will need to inform personal representatives within two months of a member's death whether inheritance tax potentially applies (because a death benefit will be paid to someone other than a surviving spouse, civil partner or charity). This requirement poses practical difficulties, as trustees may not even be aware of the member's death within this timeframe.

Consultation and implementation:  The technical consultation on these changes closed on 22 January 2025, with responses expected by the end of the summer. The changes are slated to take effect in 2027, allowing time for further consultation and refinement of the proposals.

Excepted group life schemes:  The proposed changes apply only to death benefits from registered pension schemes.  However, there has been speculation that the government may later extend the remit of the changes to include benefits from excepted group life schemes. 

Authored by the Pensions team.