As 2024 draws to a close and children around the world write their wish lists with an abundance of excitement, we look ahead to our expectations and hopes for the UK pensions industry for 2025.
01
In 2024, we majored on the need to innovate in the defined contribution (DC) space and beyond it through our reimagining pensions white paper – asking ‘Can we do DC better?’ and ‘Can we do better than DC?’. In 2025, we will see the conclusion of the consultation on DC ‘megafunds’, and the Government’s Pensions Review move from phase 1 to phase 2, where it will focus on retirement adequacy. This should bring the automatic enrolment minima back into discussion and we hope for a timetable that balances the needs of employers and members, noting that the former have recently suffered a hike in National Insurance contributions through the 2024 Budget. We would also like to see a timetable for CDC in decumulation fast-tracked as that has enormous plug-and-play potential with existing DC designs to positively improve the outcomes for millions of upcoming DC retirees.
02
It’s clear that without appropriate engagement and support, particularly in a DC environment, members face challenging decisions with a risk of making significant financial mis-steps. We hope to see more employers and trustees consider the wide range of available options and embrace approaches for supporting members during the years they are saving, as they approach retirement and potentially beyond too, depending on their choices. Improved funding positions means there may be opportunity to use surpluses from defined benefit (DB) and hybrid schemes to support the costs. We have seen significantly better outcomes being achieved when the right support is put in place and often it does not need to be extensive – having someone knowledgeable to talk to, through a guidance service, can help members get their bearings sufficiently to take action confidently and avoid the biggest pitfalls as well as helping them recognise when they could usefully seek formal advice.
03
In 2023, we published a white paper on six changes to seize the DB surplus opportunity, which was followed by a Government consultation picking up on those and other options. While some of the ideas we proposed have been enacted (e.g. a reduction in the tax rate on employer refunds, and amendments to the funding and investment strategy regulations to avoid triggering excessive de-risking), other ideas have seemingly taken a back seat through the change of Government. For many schemes, there remains little or no upside to the primary stakeholders (members and employers) for taking risk and yet plenty of downside – for such schemes, an ability to deliver upside to either or both stakeholders would help balance the gravitational pull of buyout capturing schemes earlier than may be economically sensible and avoid investments herding to overly low-return states that can be counterproductive and conflict with the Government’s number one mission: growth. In the meantime, rather than waiting for legislative change, we expect to see more employers and trustees reviewing their strategy and evaluating what opportunities exist already to gain wider benefits from current surpluses – e.g. discretionary benefit increases, meeting scheme expenses, financing accrual within the scheme (DB or DC) or facilitating scheme mergers – given that significant value can often be at stake.
04
We’ve seen new entrants to the insurance market in 2024 and expect more in 2025 and beyond. Additionally, there is a large amount of capital seeking opportunities in the DB market and consequently much interest in broadening out other areas – such as superfunds, which are due to be put on a permanent legislative footing in 2025. The previous Government had also raised the idea of introducing, from 2026, a ‘public sector consolidator’, operated by the Pension Protection Fund (PPF), to address perceptions by some that the insurance market undeserved small DB schemes. While the timeline always seemed fanciful, it is moreso now – this is a good thing because the case is unproven and the insurance and nascent superfund markets are evolving fast. For the PPF to carry out that function efficiently, it wanted an ability to absorb schemes on standardised benefit structures and so not on a level playing field with the private sector. That aspect should be excavated from the prior proposals and debated again – is there a case for some standardisation of benefits (within reason) when smaller schemes are taken to the insurance or superfund market, and in what circumstances?
05
The first Own Risk Assessments (ORAs) under the Pensions Regulator’s General Code need not be daunting if risk management processes are engineered to dovetail with that aspect of the risk management cycle. We’re starting to see trustees moving from static risk registers to much more dynamic approaches, with thoughtful curation of the risks being surfaced and debated in meetings – learning lessons from practices outside the pensions world. Risk management needs to be holistic to be effective and, as well as the big set pieces, like ORAs, we hope to see increasingly attuned approaches to risk measurement being deployed to avoid the blindspots that can cause poor decision making.
06
As the ‘new’ regime is the ‘old’ regime plus a host of new requirements, there’s a danger that it simply presents an additional compliance burden for many schemes given the time taken for it to come into being having coincided with a dramatic change in the fortunes of many schemes. Moreover, let’s not forget that the Government’s original conclusion was that the funding regime was already working well for the vast majority of schemes and the purpose was to make clearer the standards expected of those perceived to be pushing the boundaries of acceptable funding behaviour. However, the new regime can be implemented in a way that brings value by challenging the status quo – retesting strategies that may have been formulated in a very different environment (or formulated quickly in the aftermath of the LDI crisis) – and looking beyond merely setting funding assumptions prudently to other ways of managing the remaining risks of the scheme. The new regime also presents an opportunity to make sure that funding and investment approaches are truly integrated – both with each other and with the true long-term aims for the scheme.
07
The PPF’s surplus has ballooned to £13 billion (a 166% funding level). Despite this, there remains no plan for the surplus and the PPF continues to propose collecting levies at £100 million a year until legislation is amended. We’d like to see a serious change of tack on both fronts – the PPF overhauling its levy (as close to nil as it can justify) while the legislative change is pushed for to get to a zero levy, and for a Government consultation with the industry on the use of the PPF’s surplus. All other DB schemes are considering what to do with their surpluses and so it seems ironic that the Government hasn’t tackled the fund with one of the largest surpluses in the country that continues to drag unnecessarily on the financial position of other schemes.
08
Although Pensions Dashboards are not going to be live until 2026, the countdown has been ticking for some time and 2025 is a critical year for the preparations. While the bonnet is being lifted on the data and calculations required for Pensions Dashboards, we’d advise schemes not to miss the opportunity to address the automation or streamlining of other calculation processes that rely on the same or adjacent data. Also, while there is little opportunity to influence the content of Pensions Dashboards, there is the facility to link back to your scheme’s own website – therefore 2025 is a good opportunity to review and refresh them in that light so as to ensure they enable members to find what they need quickly and without putting undue extra pressure on your administration resources.
09
In both of its reviews of climate-related disclosures, the Pensions Regulator encouraged trustees to prepare climate action plans. These could span actions across the full breadth of funding, investment, covenant, member engagement and governance. Pension schemes are in a privileged position of influence in society, and although one scheme’s efforts might feel like a drop in the ocean, the collective heft of the industry gives it a significant voice. That could be through engaging with those in which it invests (including the Government via gilts), articulating stewardship priorities to its investment managers or helping its members understand the issues at play. We hope that more trustees take a close look at how they interpret their fiduciary duty as a pound of pension seems more valuable in a world worth living in.
10
Two years have passed since ChatGPT was first released to the world and the inexorable rise in interest and investment in all things AI gathered pace. The last couple of years have seen incredible advances in the foundational implementation of AI with models capable of relatively advanced chain-of-thought or step-by-step problem solving. The field is also rapidly advancing to have AI act as a user interface for more human-like interaction (with leaps in natural voice capabilities), using AI under the bonnet (with the generative AI models doing some of the ‘thinking behind the scenes’) and even AI taking actions in the digital world, such as browsing websites, filling forms and clicking links. There are now several pensions-specific deployments of generative AI and a lot of experimentation across the industry. For 2025, we hope to see genuinely useful applications of AI emerge, and discerning and careful adoption within the industry, given the new and amplified risks that come with AI systems.
The year ahead presents an opportunity for the pensions industry to drive positive change for members, employers and society. By focusing on member outcomes, tackling inefficiencies and embracing innovation, we can make lasting improvements to the pensions and savings landscape. See this summary video from our recent annual Pensions and Savings conference for some of our key messages.
