Pension Schemes Bill receives Royal Assent at last: the ‘ping pong’ has concluded

The Pension Schemes Bill received Royal Assent yesterday, becoming the Pension Schemes Act 2026, after weeks of what has been described as “ping pong” between the House of Lords and House of Commons. 

Much of the debate centred around the government’s reserve asset allocation power contained in the bill, which would enable specific targets to be set for the main default funds of defined contribution (DC) master trusts and group personal pension (GPP) auto-enrolment schemes.

The government describes the amended power as: “capped, time limited, single-use, sunsetted and subject to a savers’ interest test that has been materially strengthened”. A number of limitations to this power were agreed, including:

• Time limit: the power cannot be exercised any earlier than 1 January 2028 (regulations setting the mandation percentages cannot be made before that date). 
• Single use and sunset: the power can only be used once and is repealed if unused by the end of 2032.
• Cap: a cap on how much could be mandated to specified assets: 10% (by value) of scheme assets held in main default funds to be qualifying assets, and 5% (by value) to be of a UK-specific description. To address concerns about the differential treatment of a particular investment vehicle, direct and indirect holdings in six specified categories of asset classes count towards compliance (private equity, venture capital, private credit, interests in land, infrastructure, and unlisted equity securities not falling within one of these classes). 
• Savers’ interest test: change to the bar required to engage the ‘savers’ interest test’ –  a scheme would have to show that meeting the requirements is “likely not to be in the best interests of members” rather than likely to cause material financial detriment. It requires to be “reasonable” for that conclusion to be reached.
• TPR/FCA assessment: a new requirement on The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) to make an assessment of barriers (“competitive conditions”) to investing in qualifying assets, to be included in the report that the Secretary of State must produce before any use of the reserve power.

There has been much debate in the House of Lords, House of Commons, and across the industry generally about the existence, and potential use, of the reserve power, hence the ‘ping pong’ references. Torsten Bell, the Pensions Minister, reminded the House of Commons on Wednesday that the reserve power exists because the government’s review of pension investment found that the defined contribution pensions market is operating with an “excessively narrow focus on costs, to the detriment of saver outcomes, and that competitive pressure focused on cost minimisation is the single biggest barrier to diversifying in savers’ long term interests”. 

Other political parties and many across the industry hold the view that the government should not be directing private capital or be involved in investment decisions of schemes, and that to the extent there is a power at all, the narrowed power with limitations is welcomed.  

The reserve power is of course just one aspect of the legislation, which, as set out in our previous blog, also includes provisions on the return of surplus for defined benefit (DB) schemes, the regulatory framework for the authorisation of superfunds, value for money, consolidation of small, dormant pension pots, DC scheme scale, default pension benefit solutions, and the potential retrospective remedy which is now in force for contracted-out DB schemes grappling with historic benefit change issues arising from the Virgin Media judgement. Many of these will require secondary legislation, and guidance from the Department for Work and Pensions (DWP) and / or TPR is expected. 

Our pensions team and independent trustee company can help pension trustees and employers navigate these changes. Please pick up with your usual pensions team contact to discuss how these changes may impact your scheme.

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