Pensions Bulletin 2025/44

Chancellor sets the scene for tax rises in the Budget

In a most unusual development, on 4 November 2025 the Chancellor of the Exchequer delivered a scene setter speech to her Budget due to take place later this month. Although she did not specifically state that she would announce significant tax rises at her Budget, her speech certainly seems to be preparing the ground for this.

FRC proposes little change to SMPIs

The Financial Reporting Council is proposing no significant changes in its latest annual review of its technical standard that governs how money purchase pensions must be projected. In its consultation paper on what will become version 5.2 of Actuarial Standard Technical Memorandum 1 (AS TM1), which governs statutory money purchase illustrations (SMPIs), the FRC proposes:

• no changes to the four investment volatility groups, their boundaries and their associated accumulation rates, following the FRC’s review of market conditions as at 30 September 2025, as set out in a technical analysis paper;
• no change to any non-accumulation rate assumptions, such as the 2.5% pa inflation assumption; and
• a change to the standard so that in paragraph C.2.8 the calculation of volatility group for an investment is by reference to the five-year period ending on 30 September preceding the financial year “of the illustration date” (as opposed to the current “in which the calculation is performed”). A similar change is also made in paragraph C.2.12 which relates to when an investment assigned to a volatility group can move to a different group.

On the last point, the first of the changes is intended to clear up uncertainty of interpretation caused by the phrase “when the calculation is performed” that has existed since the introduction of version 5.1 in April 2024 (see Pensions Bulletin 2024/06 for further discussion on this). Currently, for illustration dates just before the end of the financial year, this uncertainty can result in some providers using volatility calculations relating to a 30 September year end a whole year later than other providers and, as a result, potentially pick up different accumulation rate assumptions to use.

The technical analysis paper reveals that five-year volatilities for all fund types have fallen since September 2024 and this was particularly marked for equity funds. One of the consequences is that most equity funds should now be in the 6% pa annual return volatility group. Fixed income funds still span the full range of volatilities (so from 2% pa to as much as 7% pa), whilst multi-asset funds are for the most part likely to be in the 4% pa annual return volatility group.

Consultation closes on 1 December 2025 and the results of the consultation are to be published by 15 February 2026. The new version 5.2 of AS TM1 is to apply to SMPIs with an illustration date on or after 6 April 2026.

HMRC says more about returning tax-free lump sums

HMRC’s Pension Schemes Newsletter 174 runs through a number of topics, but that of greatest current interest is fourth in the running order and responds to some common themes raised with HMRC following its article in Newsletter 173 (see Pensions Bulletin 2025/39) on returning tax-free lump sums.

In particular:

• HMRC confirms that there are no legislative provisions for tax-free lump sums to be returned to a registered pension scheme and for the tax consequences to be undone. In relation to a pension transfer contract, where a pensions commencement lump sum has been taken, the associated tax consequences (including the use of the individual’s lump sum allowance and lump sum death benefit allowance) cannot be undone even if the lump sum is returned or cancellation rights are exercised for the pensions transfer.
• If cancellation rights are provided by the scheme and are exercised by the individual, the conditions as set out in tax legislation will need to be met for the lump sum to remain an authorised payment (which presumably means that the associated pension needs to be taken within the window period, but this is not spelt out). If a payment is classified as unauthorised, it will not use up the two lump sum allowances as an unauthorised payment is not a relevant benefit crystallisation event.
• When offering cancellation rights, registered pension schemes should continue to ensure that members are aware of the tax consequences if those rights are exercised. These consequences will not be undone when cancellation rights not expressly required by FCA rules are exercised.
• HMRC may challenge alternative interpretations of the tax consequences of tax-free lump sums that have been returned after 5 December 2024, when HMRC says the position was made clear (by means of Pension Schemes Newsletter 165).

HMRC also makes a very incongruous reference to the “recycling rule” but with no further hint or guidance as to how it is relevant. The implication presumably is that HMRC could take the view that taking the pension commencement lump sum and then returning it is recycling, but they literally say nothing else except point to the rule.

Changes to the DB scheme return are coming

The Pensions Regulator has announced via its October regulatory round up, available only to subscribers, that there will be two key updates to the 2026 DB scheme return.

Enhanced unquoted asset breakdown for Tier 3 schemes

Schemes with section 179 liabilities of at least £1.5bn (Tier 3 schemes) will be required to provide a more detailed breakdown of the unquoted/private equity asset class. This will include sub-categories such as venture capital, private equity, and infrastructure equity, along with a UK/non-UK split.

The Regulator says that this change aligns with the Government’s value for money and productive finance agenda which includes similar data collection for DC schemes. Asking for this additional breakdown from the largest schemes will allow the Regulator to understand how the UK DB sector is contributing to growth, track how asset allocations and amounts change over time, and consider any system-wide effects.

Contingency planning for leveraged LDI arrangements

Following the Bank of England’s system-wide exploratory scenario published in November 2024 (see Pensions Bulletin 2024/47), the Regulator is seeking greater insight into how schemes with LDI arrangements prepare for collateral calls under extreme market conditions. Schemes will be asked to provide details of pre-agreed asset sale plans, which may take the form of a single fund, a pre-defined portfolio, or a ranking structure (also known as a waterfall). They must also specify the asset classes they plan to sell using set categories.

Further details of the changes to the DB scheme return will be shared in the coming weeks.

FRC issues Stewardship Code guidance

Following on from the updated UK Stewardship Code published in June 2025 (see Pensions Bulletin 2025/22), the Financial Reporting Council has now published the final version of its guidance to this Code. The guidance had been issued in draft form in June.

This optional guidance offers suggestions for the types of information organisations may wish to include in their reporting to help explain their approach to stewardship. 

The guidance sets out its material under each element of the Policy and Context Disclosure, which only needs to be submitted every four years or when there are more significant changes; and each Principle as demonstrated by the Activities and Outcomes Report, which needs to be updated annually. Service providers have separate guidance to that for asset owners and asset managers. 

The FRC says that the guidance reflects the flexible nature of the Code, which recognises that organisations differ in size, structure, and investment strategy, and therefore exercise stewardship in different ways.

PASA looks at AI impact on pensions administration

The Pensions Administration Standards Association has published new guidance intended to provide support for schemes, administrators and trustees to understand both the opportunities and the risks of adopting Artificial Intelligence within pensions administration.

The guidance highlights high-quality data as the bedrock of AI and sets out examples of current and emerging uses of AI in pension administration, from chatbots and predictive analytics to fraud detection and intelligent document processing, alongside clear risk management considerations.

Less than one year until the final pensions dashboard deadline

To mark that by next Halloween all pension schemes within scope need to be connected to the pensions dashboard ecosystem, the Pensions Dashboards Programme has issued another blog to celebrate progress to date and ask that schemes not lose momentum. In it, PDP Principal Chris Curry asks that everyone make this final year count and ensure that by 31 October 2026, every pension provider and scheme in scope is connected and ready to help deliver this new service to pensions savers across the UK. There is also a video containing the same message.