Pensions Bulletin 2025/18

Government responds to DB pension schemes report 

On 30 April 2025, Parliament’s Work and Pensions Committee published the Government’s response to the Committee’s report “Defined benefit pension schemes”.  This report, published in March 2024 (see Pensions Bulletin 2024/12), ranged over a number of issues, many of which are now very pertinent as we move towards: 

• the publication of the final report of Phase 1 of the Pensions Review (see Pensions Bulletin 2025/10); 
• the publication of the response to the DWP’s proposals on surplus extraction and a public sector consolidator (see Pensions Bulletin 2024/08); and 
• the introduction to Parliament of the Pensions Bill. 

The exact timings for each of the above are unknown but they are all expected before Parliament rises for the summer recess.  

Scheme surplus 

On surplus extraction (on which, back in January, the Government announced that it was to legislate (see Pensions Bulletin 2025/04)), the Government response says “as we develop the policy relating to surplus flexibilities…” which suggests that there is some doubt as to whether the legislation will have been firmed up in time to appear in the Bill when it is introduced. 

On the suggestion that some schemes should be able to purchase 100% PPF protection, it seems that Government is holding its cards close to its chest as it doesn’t respond to the specifics of the Committee’s observation which was “We remain to be convinced that the PPF underpin would be an effective incentive to trustees to consider increasing their investment risk”. 

On discretionary increases, it appears that once surplus extraction policy has been finalised there will be a requirement for any extraction decision to consider the interests of members and employers, so surplus is not always going to be 100% employer money. 

Governance 

In what appears to be a new development, a DWP consultation is promised later in 2025 to: 

• establish “what, if any, further action might be needed” in relation to the oversight of sole trustees given that the professional sole trustee model is becoming more popular; 
• examine the framework of accreditation and governance, seemingly in relation to professional trustees – so it seems that mandatory accreditation, which the previous Government had turned down, could be up for discussion again; and
• in relation to member-nominated trustees, consider how the Pensions Regulator and the DWP could provide additional support for those lay trustees who require it. 

There is also news about the Trustee register. The Regulator has been fairly silent on this matter, but the Government’s response does now let us know that it is going to happen (timescale unclear) and aggregate information from it will be published. 

Consolidators 

There is some news about DB superfunds. We now know that the authorisation and supervision framework will require regulations as well as primary legislation – and more importantly, that the regulations will be consulted on. 

On the public consolidator proposal it seems that the PPF’s ambitions are being scaled down and potentially deferred as the Government says “We continue to explore whether a small, focused Government Consolidator, run by the PPF, could be an option for schemes less attractive to commercial providers”. So, that is likely to be the essence of the response to the consultation when we see it and it seems unlikely that it will be mentioned when we first see the Pensions Bill. 

PPF and FAS

On PPF compensation levels, the calls for PPF surplus to be used to improve compensation, such as for pre-97 increases, is looking to be in doubt. This is because “any use of the PPF reserve and increases in future liabilities have an impact on the public finances”. However, the DWP continues to look at this issue “to ensure a balance can be struck between all parties”. This includes in relation to potentially introducing pre-97 increases for the FAS. The Government promises to provide further detail in due course. 

On PPF levy flexibility, the Government’s response is no more than a replaying of the 30 January 2025 announcement that the Government is to consider giving the PPF Board more flexibility when setting the levy. Hopefully, this will be firmed up by the time the Pensions Bill is introduced. 

Pensions Regulator looks at market volatility 

Given recent investment market volatility as a result of trade and geopolitical tensions brought about by US President Trump (see Pensions Bulletin 2025/14), the Pensions Regulator has published a document setting out the Regulator's thoughts as to how DB and DC schemes should respond to an unpredictable investment environment in which elevated volatility is expected to persist for some time. 

“Market oversight: Market volatility and what trustees should do” reflects the Regulator’s insight and observations, after having liaised with a number of DB and DC schemes, and highlights risks trustees will need to watch for and respond to. 

After a section that summarises how pension schemes are being affected and the Regulator’s expectations of trustees, in particular that they should have robust governance and operational resilience, the document moves on to consider areas in which trustees should focus.   

Best practice for DB schemes 

Under the above heading the Regulator identifies five key areas for DB trustees:   

• Scheme liquidity and cashflow management – Trustees should assess expected short and medium term cash outflows and how these will be met; monitor liquidity buffers under liability-driven investment mandates and be ready to provide additional liquidity should the buffer fall below the minimum requirement; and look at cashflow needs arising from currency hedging and how any associated losses should be funded. Trustees should also monitor changes in member behaviour that could increase cash demands and be alert to any delays to expected deficit-repair contributions that may affect available cash and understand and react appropriately to the cause of any such delay. 
• Investment strategy and risk management – Trustees should ensure that investment strategy is still appropriate and engage with investment advisers and managers, questioning whether they need to review current rebalancing arrangements to limit risk and cost of excessive trading; diversification levels / concentration risk; timing of any pre-agreed asset transitions, strategy changes or de-risking triggers; resilience to tail risks; the need to consider changes in investment strategy and market weightings for structural shifts in longer-term tariff policies. 
• Governance and operational resilience – Trustees should ensure scheme investment and risk governance is flexible enough to respond to short-term market developments. They should check terms of reference for sub-committees; that authorised signatory lists are up to date; and the appropriateness of current investment and risk governance arrangements. 
• Covenant and employer considerations – Trustees need to consider the impact on the employer’s business (where they rely on the employer) of the recent volatility in the global trading environment. They should try to form a view on this impact on the employer’s financial headroom and ability to support the scheme, particularly where there is a deficit. If there are concerns trustees should ensure that there are robust information sharing protocols in place to monitor any detriment to the covenant. Where there are material concerns trustees should review with advisers what investment and risk management actions are needed. 
• Opportunities and funding level changes – If on a de-risking journey Trustees should be ready to take advantage of improved funding levels by re-appraising policies on de-risking / risk transfer; consider how future easements on surplus release might influence these policies; and consider how best to invest if market dislocations present investment opportunities. 

Best practice for DC schemes 

Under this heading three key areas are identified where DC trustees and their advisers should focus: 

• Member communications to help members make informed decisions – Because short-term losses may cause members to switch investments and lock in losses Trustees will need to understand their membership and how different cohorts are affected. They may seek to monitor changes in member activity; provide guidance and clear information about the implications of current market conditions; encourage members to seek advice and guidance before crystalising losses; and remind members to beware of scams. 
• Investment and risk management – Trustees need to monitor risk and consider, on advice, whether investment strategy needs to be reviewed. They may wish to review re-balancing arrangements, diversification levels and any planned transition activity. 
• Strategic oversight – Trustees may need to identify potential opportunities and consider evolving the investment strategy. 

PRA to deliver new approach to stress testing life insurers writing bulk purchase annuities 

In a speech setting out three important aspects of the Prudential Regulation Authority’s current work to respond to the continued growth of the bulk purchase annuity sector as defined benefit schemes de-risk, the Bank of England’s Executive Director of Insurance Supervision, Gareth Truran, said that a new life insurance stress test (LIST) will be implemented this year, under which, for the first time, the PRA plans to publish both sector-wide and firm-specific stress test results for the largest UK life insurers. 

The exercise has three parts: a core financial market stress, and two additional ‘exploratory’ scenarios – an asset concentration stress, and a funded reinsurance recapture scenario. 

This LIST 2025 will focus on the largest bulk purchase annuity writers as an important part of the life sector. 

The PRA plans to publish the LIST 2025 results towards the end of 2025 in two stages: 

• The first publication will include aggregate results, with sector-level commentary and aggregate disclosures covering all three parts of the exercise. 
• The second publication will have some firm-specific disclosures, showing the high-level composition of firms’ matching adjustment portfolios by asset class, and the impact of the core financial market stress scenario on their solvency positions in each stage of the stress. 

The PRA intends to repeat this exercise every two years. 

His speech also covered other matters relevant to the bulk purchase annuity market under the headings of supporting investment and maintaining resilience. These included an update on how the new system for granting permissions to use the matching adjustment for assets is working and updates on the supervision of solvency triggered termination rights and that of funded reinsurance.