United Kingdom: Pensions – 2024 Highlights and 2025 Outlook

2024 saw significant developments for employers of occupational pension schemes in the United Kingdom, including the biggest shake-up in the pensions taxation in over a decade and major changes to the defined benefit (DB) funding regime. While 2025 appears to be a quieter year, a Pension Schemes Bill is expected, which could signal further important developments.

2024: HIGHLIGHTS

• April 2024 saw the abolition of the lifetime allowance (LTA) and introduction of a new regime for the taxation of lump sums and lump sum death benefits paid from registered pension schemes. Under the new regime, individuals have a lump sum allowance of £268,275 and a lump sum and death benefit allowance of £1.073 million. To the extent that the otherwise non-taxable element of a lump sum paid to, or in respect of, the individual exceeds these levels, it is taxed at the recipient’s marginal rate. We wrote about the implications of this abolition for employers in a previous issue of Insights.
• Additional DB funding requirements came into force for valuations from 22 September 2024. Trustees and employers are now required to agree to a “funding and investment strategy,” i.e., a strategy for ensuring that pensions can be provided over the long term. The scheme’s technical provisions must be calculated in a manner consistent with the strategy.
  
  In addition, when setting a recovery plan, trustees must now:

1. Follow the principle that funding deficits must be recovered as soon as the employer can reasonably afford; and
2. Take into account the impact of the recovery plan on the employer’s sustainable growth.

A new Pensions Regulator (TPR) funding code came into force in November 2024.

• In 2023, the High Court held that amendments to certain post-April 1997 contracted-out rights, which were not accompanied by the written actuarial confirmation required under legislation, are void. The High Court also held that the requirement to obtain the actuarial confirmation applied to all amendments, regardless of if they were adverse, and to amendments with respect to both past and future service. The employer appealed this latter decision, and in July 2024, the Court of Appeal upheld the High Court’s decision.
  
  Industry groups have asked the government to make regulations retrospectively validating any amendment which is held to be void solely because a written actuarial confirmation was not received before the amendment was made (or where such a confirmation cannot now be located). The government has not indicated what, if any, action it may take.

• In April 2024, the tax charge payable on refunds of the surplus from registered pension schemes was reduced from 35% to 25%. There is currently debate within the industry about whether the charge is payable on the gross amount of the surplus payment, or the net amount received by the employer. HM Revenue and Customs recently announced its view that the charge is due on the gross amount.
  
  The Conservative government also launched a consultation in 2024 on measures to make refunds of surplus from ongoing schemes easier. No response has been published, and it is not clear whether the Labour government will take any of the proposals forward.

• TPR’s long-awaited General Code finally came into force in April 2024. The Code consolidates ten of the Regulator’s existing codes into a single code, and sets out what arrangements, policies, processes, and systems a scheme should have in place in order to comply with the statutory requirement to have an effective system of governance and internal controls.
  
  Mayer Brown has developed an online tool that enables schemes to track their compliance with the Code’s requirements. The tool was commended in the Financial Times’ 2024 “Innovative Lawyers: Europe” report.

2025: OUTLOOK

• The 2024 King’s Speech announced that a Pension Schemes Bill would be laid before Parliament in 2025. This will provide for:
  
  1. A system for the automatic consolidation of small deferred DC pots;
  2. A new value for money framework for DC schemes;
  3. A requirement for DC occupational pension schemes to offer a retirement income solution or range of retirement income solutions; and
  4. Establishment of commercial DB superfunds.

  The Bill may well contain other provisions in light of the government’s pensions review – see below.

• The government is currently conducting a pensions review. The review, which focuses on defined contribution (DC) schemes and the Local Government Pension Scheme, is intended to:
  
  1. Boost investment;
  2. Increase pension pots; and
  3. Tackle waste in the pensions system.

  The first phase will focus on identifying any further actions to drive investment that could be taken forward in the Pension Schemes Bill. Phase two, set to begin later in 2024, will consider further steps to improve pension outcomes and increase investment in UK markets, including assessing retirement adequacy.
  
  Based on comments made by the Pensions Minister, changes to the automatic enrolment regime are unlikely in the near future. However, contribution levels may form part of the discussion around retirement adequacy in phase two of the review.

• The government recently consulted on extending the regime for collective DC (CDC) schemes to unconnected multiple employer schemes. Under a CDC scheme, employers and members make contributions of a fixed amount. However, in contrast to a traditional DC scheme, contributions are invested on a collective, rather than individual, basis and members are promised a target pension. Investment and longevity risk are pooled, and the target pension can be adjusted up or down, depending on actual investment returns and longevity experience. The current regime only allows single employers or a group of connected employers (e.g., employers in the same corporate group) to participate in a CDC scheme.
• The Autumn Budget 2024 announced that almost all death benefits paid from registered pension schemes (whether DB or DC) will form part of the deceased member’s estate for inheritance tax (IHT) purposes. This includes discretionary lump sum death benefits, which are currently outside IHT. While these changes will not come into force until April 2027, in the intervening years, employers may wish to consider whether there are more tax-efficient ways of providing death-in-service benefits than under a registered pension scheme.
• 2025 will see the first pension schemes connecting to the pensions dashboards ecosystem. Pensions dashboards will allow individuals to view information about all their pension savings, including their state pension, on a single website. All pension schemes with 100+ active or deferred members are required to connect to the ecosystem, starting with the largest DC schemes. The government has not yet set a date for public access to the dashboards.

While many of these changes have impacted and will impact trustees of occupational pension schemes more immediately than employers, some do have direct implications for employers. For those that don’t, the increased administrative burden for trustees is likely to result in higher pension costs for employers.

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