Pensions UK warns of risks in DC reforms

The pensions industry’s trade body has outlined its key priorities as the government’s major overhaul of pension rules takes shape, with three major consultations closing this month. The reforms—covering defined contribution (DC) schemes, defined benefit (DB) surplus rules, and the general levy—will fundamentally alter how pension schemes operate, from consolidation targets to funding flexibility. Pensions UK, the industry’s leading representative, has submitted detailed feedback on each proposal, advocating for changes while warning of potential unintended consequences.

The most pressing issue is the government’s plan to consolidate the DC sector by establishing a £25 billion minimum size requirement for “main scale default arrangements.” These defaults, which underpin master trusts, must meet this threshold by 2035. However, confusion over how the scale test will function is already causing disruptions. Consultants are reportedly excluding schemes below the target from provider selection processes, even if those schemes could grow to meet the requirement over time. Pensions UK argues that rigid enforcement of the scale test could stifle innovation rather than promote it.

“Regulation should allow schemes to develop solutions that reflect how people plan to use their savings in retirement, rather than incentivising fewer choices simply to meet a threshold,” said Zoe Alexander, director of policy and advocacy at Pensions UK. “Uncertainty is already affecting which schemes are considered during provider selection, regardless of their performance, governance or potential to grow.” The trade body has called for clearer transition pathways and recognition that scale can exist across legally separate schemes if they share governance and investment strategies.

This stance reflects broader concerns that the reforms may prioritize consolidation over saver outcomes. Pensions UK warns that if the scale test becomes inflexible, it could discourage smaller schemes from investing in growth, particularly those serving niche or high-quality markets. Providers currently face significant uncertainty about compliance.

Levy fees face transparency backlash

Meanwhile, the general levy, a fee charged to schemes to fund regulators and ombudsmen, is also undergoing review. The Department for Work and Pensions has proposed increases for all scheme types starting in 2027, but Pensions UK has criticized the plan as flawed. Levy revenue has more than doubled since 2018-19, rising from £43.5 million to £98.4 million in 2025-26, yet the trade body argues the current system lacks transparency and fairness. Master trusts, which often serve members with small pension pots, will face higher fees under the proposed per-member charging method.

The levy’s structure has remained unchanged since 2018, despite market shifts such as the growth of automatic enrolment and consolidation. Pensions UK has demanded a full review before any changes take effect, warning that higher costs could undermine the government’s consolidation objectives. “The government should not make significant changes to who pays what before answering the more fundamental questions about what the levy funds, how costs are allocated and whether the system is delivering value for money,” said Julian Mund, chief executive of Pensions UK.

A third consultation focuses on surplus release for well-funded defined benefit (DB) schemes, offering a rare area of agreement. Pensions UK supports the draft rules, which grant trustees greater flexibility to distribute excess funds to employers and members. Two-thirds of its members backed the proposals, viewing them as a balance between safeguards and practicality. However, the trade body cautions that the government must avoid creating the assumption that surplus is always available for payout.

Surplus rules need flexibility for trustees

Current drafts risk imposing a rigid, one-size-fits-all approach, Pensions UK argues, with overly prescriptive advice requirements and strict timetables. The association advocates for trustees to retain discretion, allow phased releases, and ensure the process aligns with real-world scheme circumstances. “Member security must remain central, and trustees need the ability to take account of the scheme’s long-term funding and investment strategy, the strength of the employer covenant and the risks that c,” according to Pensions UK. “These regulations should give schemes a clear and workable framework, not a one-size-fits-all process.”

Industry stakeholders now await the government’s response to the submitted feedback. The next steps will determine whether the reforms achieve their goals or introduce new inefficiencies. Pensions UK’s responses reflect a cautious yet constructive approach: supporting changes that benefit savers while opposing measures that could harm the schemes meant to serve them.