All eyes on the Pension Scheme Bill 2025
Executive summary:
- The Pension Scheme Bill 2025 aims to allow surplus withdrawals from defined benefit (DB) pension schemes to support economic growth, with agreements between trustees and employers to balance member benefits and reinvestment opportunities.
- The UK government’s plan may be hindered by intergenerational wealth inequality and the concentration of surpluses in large schemes, limiting broader reinvestment.
The UK Prime Minister, Sir Keir Starmer, and Chancellor of the Exchequer, Rachel Reeves, have provided the next installment in their campaign to mobilise pension assets to support UK economic growth.
Their latest announcement focuses on facilitating the withdrawal of surpluses for DB pension schemes and their members. The exact details of the policy changes will be published in the spring in response to the ‘Options for DB schemes’ consultation.
The proposed legislative changes could permit the extraction of surpluses, where an appropriate agreement is made between the trustees and employer, to provide benefit to both members and the employer while still providing sufficient protections.
The government’s ambition is abundantly clear: change the regulatory environment to enable greater investment in the UK and drive economic growth.
Will it work?
The premise is that the economic benefit of any surplus would be shared between members and the sponsoring employer. This would increase benefits to members and give the opportunity for the sponsoring employer to re-invest into their core business, driving economic growth.
However, while the changes are a step in the right direction, there are factors that make the goal of facilitating economic growth more challenging than it may initially appear.
Intergenerational inequality
One critical barrier to growth is intergenerational inequality. Pension wealth is disproportionately concentrated among older generations, as evidenced by the Office for National Statistics' Wealth and Assets Survey. Over the last 20 years, inequality has grown significantly, and the introduction of auto-enrolment has done little to bridge this gap. Addressing intergenerational inequality is vital to creating wealth for younger demographics, who often possess the greatest risk tolerance to support economic growth through more expansive investments.
Concentration of surpluses
Another issue the UK government faces is that the bulk of DB surpluses are concentrated in the largest schemes. 39% of the largest schemes (by number of members) are fully funded on a full buy-out measure, compared with around 30% of small and mid-sized schemes, as reported in the Purple Book 2024. Surpluses are also concentrated among schemes with the highest proportion of pensioner members.
This creates a structural imbalance: the release of surpluses would disproportionately benefit large schemes and their sponsoring employers - often multinational corporations or industry-wide schemes. As a result, it is far from guaranteed that these surpluses will be reinvested in the areas that the government anticipates will stimulate UK economic growth.
Funding level variability
Mobilising economic growth through pensions is not a new agenda, but history shows the challenges. Pensions Acts in 1995 and 2004 attempted to balance member protection with investment flexibility. However, market disruptions and governance failings, such as the bursting of the tech bubble and the impact of pension contribution holidays, hindered progress.
The government’s argument is that there is now an abundance of caution which can be reduced. Its latest announcement is framed in terms of missed investment opportunity and insufficient risk taking by pension funds.
While today’s funding levels provide a very welcome backdrop for any changes in the upcoming pensions bill, the details of the legislation are critical to protecting members, supporting employers and delivering on the government’s growth agenda.
All hands on deck
Discussions on how pensions can support economic growth have moved a long way from Jeremy Hunt’s Mansion House speech in July 2023. At that time, pensions (DB, defined contribution (DC) and Local Government Pension Schemes (LGPS)) were treated as a collective, as if they all had the same considerations. The good news is that policy development has moved on to be more specific in each key segment, which should benefit the respective markets:
- Across the LGPS, there is a flurry of work ongoing to meet the proposed government requirements of 100% pooling by March 2026 and to ensure Pools can provide advice to their administering authority clients.
- In the DC arena, the focus of policy shifts is on accelerating consolidation. At the same time, the industry is moving to provide access points to private markets for DC schemes. The evolution of LTAFs in UK, ELTIF 2.0 in Europe, and Interval funds in the US, demonstrates how universal this policy approach is.
- The focus in the DB world has shifted to looking at extraction of Surplus and addressing what is described as an abundance of caution in the behaviour of DB trustees.
The bottom line
The Pension Schemes Bill 2025 has the potential to transform the role of pensions in driving UK economic growth, providing better outcomes for members, employers and the UK as a whole. This latest announcement further encourages trustees and sponsors to discuss and evaluate all the options available to them.
However, the future is far from certain with many of the details to be confirmed and challenges such as intergenerational inequality to be addressed.
There is lots to be optimistic about across the UK pensions landscape, but it’s constantly evolving. Staying proactive and adaptable has never been more important.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.