UK defined contributions pension reforms ‘big deal’ for providers and trusts

Tom Barton, Katie Ivens and Mark Baker, pensions law experts at Pinsent Masons, were commenting following the publication of the final report of the government’s pensions investment review. The report outlines a vision for the future of pensions, with a focus on scale, value, and economic growth. It follows months of consultation and industry engagement since the review was launched in July 2024. The reforms are designed to consolidate pension schemes, unlock productive investment, and deliver better returns for savers.

At the heart of the reforms is a push to consolidate the DC pensions market. The government plans to legislate for a system that encourages fewer, larger and better managed pensions schemes. This move is expected to reduce costs, improve governance and enable schemes to invest in a broader range of assets, including infrastructure and high-growth companies.

Barton said: “The final report picks up from where the Mansion House Accord left off, providing the basis for the government’s side of the bargain. Industry is now tasked with getting minimum investment allocations in place – and in the knowledge that the government could still mandate investment levels in future if it does not like what it sees.”

The report confirms changes that will include a requirement for a minimum default fund size of £25 billion asset under management (AUM) by 2030, with a 2035 backstop – likely to boost market activity as providers look to meet scale requirements.

Baker said: “The impact of the £25 billion rule might not be as far reaching as some are suggesting, with most commercial providers confident they will reach that level. There are some interesting questions to be decided - whether providers will still be able to offer alternative defaults, and exactly how the rules will apply if an employer wants a tailored investment strategy. A key theme throughout is to avoid disorderly effects on the market, and for now the announcement probably achieves that.”

Other reforms covered by the report are also intended to support the consolidation agenda. They include contractual overrides to enable transfers without member consent from contractual-based DC schemes and a new DC ‘value for money’ assessment framework, expected to require schemes to consolidate if they cannot offer value. The government will also introduce a reserve power to ensure that the shift toward productive investment becomes a permanent feature of the DC market.

Additionally, the report sets out the government’s plans for boosting the UK’s pipeline of investment opportunities. This includes improving access to infrastructure projects, scaling up venture capital, and enhancing transparency around investment performance. This will involve a 10-year infrastructure strategy to be published with the June spending review, along with government commitment to delivering an infrastructure pipeline with a 10-year horizon.

The report further marks a shift in regulatory emphasis from cost minimalisation to value for money. It argued that while low fees are important, they should not come at the expense of long-term returns. A new framework will be introduced to assess pension schemes based on performance, governance and investment strategy – not just charges.

Baker said: “A key question will be how the reforms interact with the detail of the new value for money regime. We hope value for money metrics won’t get too complex, and that the regulators keep this aim as the two regimes are aligned.”

In the report, the minister for pensions also announced the imminent launch of the second stage of the government’s pensions review.

Ivens said: “Some in the industry will welcome a fairly firm commitment to the second phase of the pensions review, focusing on pension adequacy – recognising that many employees simply do not have enough DC savings to retire. However, for many employers the prospect of rising pension contributions would be another cost blow on top of the government’s employer National Insurance increase.”