Happy New Year! Here are our thoughts on the ten key pensions developments that trustees and employers need to be preparing for in 2025.

1.  The Virgin Media case/ "section 37 certificate" issues

We expect to see ongoing fall out from the Virgin Media case in which the courts held that a scheme amendment is void if no "section 37 certificate" was obtained from the scheme actuary when the legislation required this.  Audit firms are alive to the issue and are asking sponsoring employers about it, and trustees of schemes moving to buy-out need to be clear on what benefits are being secured. We are aware of at least one court case coming up that is due to consider section 37 related issues, and we understand a second case may be in the pipeline.  The pensions industry is in discussions with the DWP, but it is not yet clear whether the DWP will bring forward legislation to address the issues.

2.  IHT on pension scheme death benefits

The Chancellor announced in the Budget that most pension fund death benefits will be included in the value of a person's estate for inheritance tax purposes from 6 April 2027.  The Government's technical consultation says that this change will not apply to "life policy products purchased with pension funds or alongside them as part of a pension package offered by an employer", but does not explain what this means.  We expect this to become clearer once the Government publishes a response to its consultation and the draft legislation.

3.  More schemes moving to buy-out

We are continuing to see many schemes securing benefits through buy-ins/buy-outs.  We have a wealth of experience in this area, including advising on high value run-off cover (the insurance taken out against potential liabilities that may emerge after a buy-out ).  TPR also issued updated "superfunds" guidance last year and superfund Clara recently announced its first deal involving a transfer from a scheme with a solvent sponsoring employer.    

4.  Tax on surplus payments to employers: has HMRC got it right?

HMRC has recently set out its interpretation of how the tax should be calculated when a surplus payment is made to a scheme's sponsoring employer.  HMRC's view is that the cash paid to the employer should be treated as a net payment that has to be grossed up to calculate the tax due.  The alternative would be to treat the cash paid to the employer as the gross amount, meaning that the tax due is 25% of that.  HMRC's interpretation results in a higher tax charge.  We think there are strong arguments for challenging HMRC's view.  It will be interesting to see whether anyone has the appetite to bring such a challenge in the coming year.

5.  New Value for Money framework for DC schemes

The Government intends to introduce a "Value for Money" (VfM) framework to provide a consistent regime for assessing the performance of defined contribution (DC) pension arrangements against comparators, resulting in a red/amber/green (RAG) rating.  A red or amber rating will trigger a requirement for an action plan to address the poor value.  The FCA has already consulted on how it will apply the requirements to personal pension schemes. The Government intends to impose largely equivalent requirements on DC occupational pension schemes.  We expect the final form arrangements to impose significant additional compliance requirements on DC workplace schemes.

6.  Default funds: radical changes ahead?

The Government is currently consulting on radical changes to the statutory regime applicable to multi-employer DC pension schemes (including both master trusts and group personal pension schemes).  It plans to introduce a minimum size for "default funds" (broadly, the funds into which contributions are invested where a member does not make an active investment choice) and a limit on the number of default funds.  The new requirements will apply from 2030 at the earliest, but by the end of 2025 we expect to have a much clearer idea what the minimum default fund size and maximum number of default funds will be.

7.  Pension Schemes Bill to bring new measures re small pots, the Pensions Ombudsman and DC schemes

The Government is due to publish its Pension Schemes Bill which will include measures to automatically bring together small deferred pension pots, new duties on trustees of occupational DC schemes to offer a retirement income solution, and designation of the Pensions Ombudsman as a "competent court" so that trustees can rely on an Ombudsman determination to recover an overpayment from a member without having to seek a court order too.

8.  First valuations under new DB funding regime

The new defined benefit funding regime applies to valuations with an effective date on or after 22 September 2024, so 2025 will see many schemes producing their first actuarial valuation under the new regime, which is significantly more prescriptive.  The legislation now specifically incorporates the principle that a scheme should be brought up to full funding on the statutory funding basis as soon as the employer can reasonably afford.

9.  First "own risk assessment" (ORA) 

The Pensions Regulator's General Code of Practice came into force in March 2024, triggering the start of the period within which trustees must carry out the scheme's first "own risk assessment" of how well the scheme's "effective system of governance" (ESOG) is working. The exact deadline for completion of the ORA will vary from scheme to scheme.  However, an ORA can only be carried out if the necessary governance system has been in place long enough for the trustees to assess its effectiveness, so trustees who have not yet done so should ensure they have an ESOG in place that meets their obligations.

10.  Pensions dashboards 

In October 2024 the Minister for Pensions confirmed the Government's commitment to the existing timetable for schemes to connect to pensions dashboards. Under the government's guidance, the expected connection dates for all occupational pension schemes with 1000 or more "relevant members" fall during 2025.  The strict legal deadline for connecting is 31 October 2026, but scheme trustees are required to have regard to the guidance, and the Pensions Regulator is unlikely to be sympathetic to breaches if trustees cannot demonstrate that they worked towards the deadline in the guidance.  We are already advising trustees on updates to their administration agreements to cover pensions dashboards.  Trustees who deal with this in a timely manner rather than leaving things until the last minute are likely to be in a stronger negotiating position.