UK pensions reforms face backlash over scheme size rules

Row pension, duck, bird, water bird, nature, animal. Photo: Kathy_Büscher/Pixabay

The UK’s pensions industry is undergoing its most substantial reforms in recent years, with the trade association Pensions UK responding to three key government consultations that will alter how defined contribution (DC) schemes, levies, and surplus releases function. These consultations—covering the expansion of DC schemes, changes to the general levy, and the release of surplus payments from defined benefit (DB) funds—close this month, creating a key moment for providers, trustees, and savers.

The government’s proposal to reduce the number of DC schemes by setting a £25 billion minimum size requirement for “main scale default arrangements” has already provoked discussion. This rule, intended to streamline investment strategies under master trusts, raises practical concerns. Pensions UK notes that some consultants are already excluding schemes below this threshold, even though the government has granted a compliance deadline of 2035. The trade body warns that without clearer transition rules, consolidation may be driven more by uncertainty than genuine efficiency.

Zoe Alexander, director of policy and advocacy at Pensions UK, stated that regulations should allow schemes to develop solutions aligned with how people plan to use their retirement savings. She added that current uncertainty is already influencing provider selection, regardless of a scheme’s performance or growth potential.

The association argues that the scale requirement should focus on practical asset management rather than just legal structure. For instance, funds sharing the same investment strategy, team, and governance framework should qualify as scaled, even if they fall below the £25 billion benchmark. Pensions UK also urged the Department for Work and Pensions (DWP) to establish “alternative defaults” for schemes unlikely to meet the threshold, preventing smaller providers from being unfairly disadvantaged.

While larger schemes may improve efficiency, the risk is that consolidation could limit saver choices. Pensions UK’s response highlights a broader conflict: reforms must prioritize better outcomes over rigid size requirements. The trade body’s position reflects growing concerns that forced consolidation could stifle innovation if not carefully managed.

Levy system needs urgent fairness review

The pensions market has transformed significantly in recent years, with automatic enrolment, master trusts, and DC growth reshaping how savings are managed. However, the general levy, funding the Pensions Regulator, Money and Pensions Service, and Pensions Ombudsman, has not adapted accordingly. Pensions UK is now calling for a full review before proposed levy increases take effect in 2027.

Levy income has more than doubled since 2018–19. Despite this growth, the DWP plans to raise charges across all scheme types. Pensions UK argues the current system is outdated, with costs unfairly distributed, particularly for master trusts, which serve many members with small pots. Higher levies could also undermine the incoming Value for Money framework, as increased costs may overshadow governance improvements.

Julian Mund, Pensions UK’s chief executive, warned that levy changes should not be rushed without addressing fundamental questions: What services does the levy actually fund? Are costs distributed fairly? Is the system delivering value for schemes and savers? The association is pushing for a temporary cap on levy payments while a review is conducted, ensuring schemes are not overburdened during this period of major regulatory change.

Surplus releases must balance flexibility and caution

Separately, Pensions UK has welcomed the government’s plans to allow DB schemes to release surplus funds but has sought refinements to the proposals. The draft rules aim to give trustees greater flexibility, and 69% of Pensions UK’s respondents supported the balance between safeguards and flexibility. However, the trade body stressed that surplus release should not be treated as automatic or one-size-fits-all.

The current draft risks creating an assumption that excess capital must be distributed immediately, Pensions UK argued. Instead, schemes should have the option to release surplus in phases, with trustees retaining control over timing. The association also called for clearer guidance on funding thresholds and advice sources, ensuring flexibility rather than rigid requirements.

Member security must remain central, and trustees need the ability to take account of the scheme’s long-term funding and investment strategy, the strength of the employer covenant, and the risks that c.

The reforms come as part of Pensions UK’s broader effort to prepare the industry for 2030. With these consultations now closed, the next steps will determine whether the government’s vision for consolidation, levy fairness, and surplus flexibility can be implemented without disrupting the market or leaving savers worse off.