Pension Schemes Bill and beyond – default pension benefit solutions

This article was written by Jack Gillions and Fahmida Rahman

An important aspect of the recent Pension Schemes Bill is a new statutory duty for trustees of defined contribution (“DC”) trust-based pension schemes to design and offer one or more ‘default pension benefit solutions’ (“default solutions”) for members at the point of retirement. The new requirements cover trust-based DC schemes including master trusts, although the FCA will be putting in place similar rules for group personal pension plans (“GPPs”) and other contract-based arrangements by 2028. 

A key part of the previous government’s Mansion House proposals in 2023 was to bring in a duty to provide decumulation solutions. This was intended to require trustees to offer DC retirement solutions appropriate for the scheme’s membership, either in-scheme or via a transfer to another scheme, with members who do not make an active choice needing to be placed into a default solution. 

Under the new requirements in the Bill, members will retain the full suite of retirement options provided under the 2015 Pension Freedoms, but there now need to be default solution(s) made available to those who do not (or cannot) make their own choice. The changes are, in part at least, a ‘rebadging’ of the previous government’s proposals but it is clear from the detail in the Bill that the changes go further and reflect a broader policy goal to ensure that all members are well-supported through their retirement journey. 

Options for members on decumulation

As a brief recap, the main ways in which members can access and use their DC pot at retirement have all in theory been available to members since the introduction of the Pension Freedoms. Those choices include, for example, taking benefits through a lifetime annuity with an insurance provider, flexi-access drawdown, uncrystallised funds pension lump sum (known as an “UFPLS”) or a pension commencement lump sum or alternatively members can transfer to another scheme.

In practice, though, the options are limited by the type of DC arrangement and this can vary widely across the pensions industry. Whilst some smaller schemes may only offer limited decumulation options, some of the largest DC schemes and master trusts are already advancing rapidly with innovations such as more flexibility in the early years of a member’s retirement whilst also providing for a phased approach with different levels of flexibility, including inflation and longevity protection including deferred annuity products. 

The options are clearly numerous and increasingly complex and of course have very significant financial consequences for members. The reforms in the Bill can therefore be seen in the context of the challenges facing DC pensioners globally, including a lack of member engagement, poor retirement outcomes, inconsistency of decumulation options based on the scheme, as well as a lack of advice and guidance taken by members. 

How the Bill attempts to address challenges at the decumulation stage

• Low Member Engagement at Retirement – default solution

Many pension scheme members are passive or disengaged and may be unlikely to make active choices about their pension at retirement. This lack of engagement can inevitably lead to poor financial decisions at retirement, such as choosing inappropriate income options or failing to plan adequately for longevity.

To address this, a key requirement in the Bill is the requirement on trustees and managers to design and offer one or more “default pension benefit solutions” for members whereby members will be automatically placed into a default decumulation option unless they actively choose an alternative. To some extent, this borrows from the policy mechanics behind the auto-enrolment model used during the accumulation phase as members will never be asked to make an active choice at retirement if they do not wish to, therefore acting as a backstop for members. 

Trustees will be responsible for ensuring that members are offered appropriate decumulation options and are not left unsupported at retirement. 

• Inconsistent Access to Decumulation Options

A further issue at decumulation is that pension schemes may lack the scale or resources to offer a broad range of decumulation products or indeed the options provided to members may not be appropriate at the relevant life stages when members choose to access their pension.

The Bill aims to tackle this by requiring trustees to offer default pension benefit solutions tailored to the specific needs, interests and circumstances of the scheme membership as a whole, and where appropriate any subset of that membership (which may be based, for example, on member cohorts with a longer life expectancy or the expected value of their pension pot). The Bill includes broad powers for the government to pass regulations which detail how trustees should assess the needs and interests of the scheme membership for the purposes of the default solution. 

Where schemes cannot offer their own default solution, the legislation provides that schemes will need to identify a scheme that can provide a suitable solution, enabling trustees to collaborate with external providers to deliver higher quality decumulation options that meet the new standards (see ‘Transfers to Third Party Schemes below for more detail).

• Poor Retirement Outcomes

Without proper guidance, retirees face the risk of either depleting their pension pots too quickly or being overly cautious and drawing too little income, both of which can lead to financial insecurity in later life.

To mitigate those risks, the Bill mandates the provision of tailored default decumulation solutions that are designed to provide a regular income in retirement whilst being tailored to the needs of the scheme’s members or a subset of those members. Furthermore, trustees will be required to review the design (and if appropriate the number) of the default pension benefit solutions at prescribed intervals. 

A key driver behind the legislation therefore seems to be that trustees will be expected to take a more active role in ensuring that default options are suitable for their members and that individuals are not left to navigate complex financial decisions on their own.

Transfers to Third-Party Schemes

Where it is not practicable to offer a default solution in-scheme, or where trustees believe a better retirement outcome can be achieved with another provider, schemes may offer a qualifying default solution in another scheme. Where that’s the case, schemes would need to identify an appropriate scheme that is willing to receive the transfer-in and make a qualifying pension benefit solution available to the transferred member. Importantly, transfers to a default pension benefit solution provided by another scheme would need the member’s written consent before making the transfer. 

Further details are to be ironed out in terms of the receiving schemes meeting any other conditions prescribed under regulations before they qualify for transfer as well as regulations which may prohibit or limit charging transfer fees and the manner in which cash equivalents are calculated and verified. 

The government has said it anticipates market innovation in this space, but if the market fails to deliver, secondary legislation may introduce schemes of last resort to ensure coverage.

CDC “decumulation-only” schemes

We’re already seeing some significant product innovations and momentum on decumulation retirement solutions in some schemes, such as, later-life protected income products and, potentially, extending Collective Defined Contribution (“CDC”) schemes to “decumulation-only” models could also be a key part of this.

Decumulation only CDC isn’t an option yet but the Pensions Minister Torsten Bell confirmed in April that this is a solution that the Govt is looking to provide.  The DWP has confirmed it will be consulting in the Autumn this year on regulations to allow multiple unconnected employers to establish CDC schemes.  

Strategy and communications

Another core aspect of the proposals is the communications strategy and information to be provided to members. The Bill’s requirements include that Trustees and managers need to provide a clear and plain description of the default options available to members, trustees’ opinion as to the relevant circumstances (e.g. age, pot size) where such default solutions may be suitable and the decisions and stages required so that members have the information needed at an early stage to avoid any nasty surprises when drawing down on their pension.

As part of this, trustees must develop and maintain a comprehensive “pension benefits strategy.” This strategy serves as a blueprint for how the scheme identifies member needs, designs and reviews default pension benefit solutions, and manages the process for “transferable members”. The strategy must be reviewed periodically and made available to the Pensions Regulator and scheme members upon request to ensure a level of transparency and accountability.

Regulations may prescribe specific requirements regarding the content, format, and review frequency of the pension benefits strategy. Trustees must also be able to demonstrate how they have incorporated relevant regulatory guidance and principles into their decision-making processes. This includes showing evidence of how member needs have been assessed and how those insights have shaped the design of default solutions.

Failure to comply with these duties is not without consequence. The Pensions Regulator is empowered to issue civil penalties for non-compliance, with fines potentially reaching up to £100,000. These penalties are subject to review and appeal under the Pensions Act 2008, providing a clear enforcement mechanism.

Key risks and duties for trustees and providers in relation to the new requirements 

The DWP has been clear that steps should be taken to ensure members are not put at undue risk of their income coming to an end during retirement. Trustees and providers will need to be thinking about whether default solutions are inappropriate for members or cohorts of members so that members don’t, for example, run out of money or alternatively circumstances where they draw insufficient income in retirement. 

As to the core trustee duties in relation to the new decumulation requirements, the focus has mostly been on duties in the context of the “accumulation” period and less on “decumulation”. However, we do not see there being a significant shift in the core duties that we’re all familiar with, that is, namely, to act in members’ best financial interests; comply with the governing trust deed and rules; and take proper advice.

From a practical standpoint, trustees and providers will want to facilitate good decision-making and protect themselves by reducing the risks of later challenge from dissatisfied members. In short that means adopting good practices that most schemes are already following, such as taking proper advice, ensuring trustee protections such as liability insurance and employer indemnities are in place where applicable and that there is good quality member engagement to facilitate retirement choices. Working to better understand membership data and due diligence of retirement solutions either in scheme or with another third party together with careful monitoring of those solutions will all form part of this. 

It may also be necessary to review and potentially update scheme rules to avoid inconsistencies with the new default pension solution requirements and ensure that there are appropriate protections in the rules. 

FCA’s Targeted Support: A Complementary Opportunity

Alongside the Pension Schemes Bill, the Financial Conduct Authority (“FCA”) has published a consultation paper setting out its proposals for the “targeted support” framework. Broadly, this is aimed at helping non-advised savers make better financial decisions. This should allow authorised firms to offer tailored nudges to groups of consumers with shared characteristics, such as those withdrawing income at unsustainable rates or maintaining excessive cash holdings. 

The FCA has made clear that while pension scheme trustees are not the primary focus of the proposals, the FCA has been explicit that trust-based pension schemes and their trustees are within scope of the targeted support plans. This presents a potential opportunity for trustees to take a more active role in guiding disengaged members, particularly at retirement. The FCA’s proposals broadly align with the Bill’s emphasis on structured, accessible, and personalised support, and The Pensions Regulator has encouraged trustees to engage with the FCA consultation.

However, the framework raises practical questions around member segmentation, outcome measurement, and liability if nudges lead to poor outcomes. Industry bodies, including the Association of British Insurers (ABI), have called for clear safeguards and compensation mechanisms to protect both members and trustees.

Despite these challenges, the initiative could help close the growing advice gap. With only 9% of adults receiving financial advice on pensions or investments last year, and millions holding large cash savings due to lack of confidence, the need for accessible, non-advised support is urgent. 

Trustees must also be mindful of the regulatory perimeter, particularly the boundary between guidance and regulated advice. Communications must be carefully framed to avoid straying into regulated advice territory, particularly when discussing decumulation options. Contractual protections under the Consumer Duty may also need to be considered where trustees work with third-party providers.

Looking Ahead 

This Bill represents a key shift in how retirement outcomes are supported in the UK. To meet the new legal duties and deliver better outcomes, we recommend that trustees should be preparing early, engaging with regulatory guidance, strengthening member communications, and exploring partnerships for decumulation solutions where necessary. 

Burges Salmon is well placed to advise on all aspects of DC pensions and decumulation issues. If you would like to explore this topic further, please contact Jack Gillions or Susannah Young.