It was a long road, and at times the ride has been bumpy, but the Pension Schemes Act 2026 has finally arrived at its destination. The Act is important for trustees, providers and employers: it launches a wide-ranging suite of reforms which undoubtedly have the potential to reshape the pensions industry over the next few years.
Changes affecting DB schemes
‘Section 37’ remediation: Where an amendment to a formerly contracted-out DB scheme fell foul of historic restrictions requiring actuarial confirmation, it may be retrospectively validated if trustees obtain actuarial confirmation that the change would not have prevented the scheme from continuing to meet the appropriate statutory standard. This mechanism comes into force immediately, with the FRC and TPR having already released helpful guidance (for actuaries and trustees respectively) to support roll-out of the solution. For further information, see our CMS Legal Update here.
Surplus: As set out in this CMS Legal Update, trustees will be able to modify their scheme rules to permit surplus to be paid to an employer - or to remove or relax restrictions in an existing power - while the scheme is ongoing. We expect consultation on draft TPR guidance, and on regulations to outline the funding threshold and additional payment conditions, before the new rules take effect late in 2027.
Superfunds: The Act lays out a legislative structure for the design, authorisation and supervision of superfunds - commercially-run schemes supported by a capital buffer which act as consolidators for DB schemes. Consultation on regulations is anticipated later this year, with a view to finalising the regime by 2028.
PPF compensation: As announced in the Budget, from January 2027 the Pension Protection Fund (and Financial Assistance Scheme) will increase compensation relating to pre-April 1997 pensions in payment based on CPI, capped at 2.5% - where the original scheme granted increases at that level or higher. Other changes improve compensation provisions for terminally ill members and allow PPF compensation data to be provided to pensions dashboards.
PPF levies: This year the PPF confirmed a zero risk-based levy for conventional schemes. The Act gives it additional flexibility to minimise any levy that might be due in future years.
Local Government Pension Scheme: The Act introduces new requirements for the LGPS to reform asset pooling, on developing local and regional investment policies and strengthening governance.
New law for DC schemes
Value for money (VFM): The Act creates a framework for VFM in trust-based DC schemes, designed to dovetail with the FCA’s approach for contract-based schemes (see our CMS Legal Update here). Schemes will assess VFM against a market comparator group and those not achieving the necessary rating must take action to remedy this. Consultation on regulations will follow with the first VFM assessments targeted for 2028, initially for default funds.
Decumulation duty: Trustees of schemes offering DC benefits will need to offer decumulation options to members on retirement and to enrol any member not making an active choice into the scheme’s ‘default pension benefit solution’, or to transfer them to a suitable alternative arrangement. During the Bill’s passage, the duty was extended to deferred as well as active and pensioner members. After consultation on the detail the duty would apply to master trusts from 2027 and other schemes from 2028.
DC scale: Most DC master trusts used for automatic enrolment must have at least one default arrangement with over £25bn in assets under management (AUM) by 2030. TPR now has power to issue a Code of Practice in relation to these ‘megafunds’. There will also be a ‘transition pathway’ for smaller schemes (of at least £10bn AUM by 2030) - see the recent TPR Statement here - and an ‘innovation pathway’ for new market entrants. Late in the Parliamentary process, the Government agreed to ensure that regulations shaping the scale test have regard for innovation, competition, and improved member outcomes.
‘Mandation’ power: The Act was delayed by a marathon round of “ping-pong” between the two Houses of Parliament as the Government and Opposition sparred over a controversial reserve power, linked to the Mansion House accord, to enable the Government to set targets for master trust default funds to invest in specified asset classes. A compromise was eventually thrashed out, with Ministerial commitments that the power will be subject to a ‘savers interest’ test, can only be used once, will ‘sunset’ in 2032 and be fully repealed in 2035.
Small pot consolidation: The Act introduces automatic consolidation of certain dormant DC pots valued at £1,000 or less. Consultation on the detail is expected in 2027/28 with a view to automatic consolidation starting in 2030.
Other points to note
Some help on overpayments: A welcome reform relating to the recoupment of overpayments classifies the Pensions Ombudsman in the same category as a “competent court” under section 91, Pensions Act 1995. This will let schemes set off a disputed overpayment from future pension after an Ombudsman determination in the trustees’ favour, without the need for a further order from the County Court.
Trustee investment duties: A notable absentee from the Act is the Government’s planned amendment to facilitate statutory guidance on trustees’ exercise of their fiduciary investment duties, which was surprisingly defeated in the Lords. However, it appears that the technical working group convened for this purpose is to draft the guidance anyway, with the Minister promising that Government “will come forward with proposals to put the guidance on a statutory footing in the months and years ahead.”
Next steps
The precise action points for trustees and employers will depend on the nature and profile of their scheme, but all schemes will need to make changes to policies and processes as a result of the new legislation. For many DB schemes, the obvious short-term action is that Royal Assent provides the green light for Section 37 remediation exercises to begin in earnest.
Otherwise, while we now have primary legislation, we still await much of the detail of how key reforms will operate in practice. We can therefore expect several consultations over the coming months (and years) on regulations to put much-needed flesh on the bones. DWP has also promised to issue a revised version of its roadmap setting out the sequencing of the key stages, which will allow the industry to get a better idea of timings on both the DB and DC side.
We will further explore some of the DB-related issues raised by the Act at a seminar on 30 June. For further information, please speak to your usual contact at CMS.
