Pension Schemes Bill – Focus on DC mega-funds

Consolidation of the DC pensions market has been in successive Governments’ crosshairs for some time now, but, with the publication of the Pension Schemes Bill on 5 June 2025, we now have a framework for political ambition to become pensions industry reality.  In this article we take a closer look at what the Bill has to say about the new minimum size requirements that will apply for certain DC schemes, including what we know so far about the new scale requirements (and what we don’t), when the changes are happening and which schemes are within scope as the Bill currently stands.

Key points

• Minimum size requirement of £25bn for auto-enrolment DC arrangements, unless exempt
• Transition and innovation pathways will be available
• Details to come in regulations – look out for further consultations
• Target date 2030, likely with a smaller number of providers

Context

In December 2024, we wrote an article in response to the new Chancellor’s first Mansion House speech, which, amongst other reforms, set out a long-term vision for a landscape shift in the DC market place.  The speech was accompanied by the launch of a DC Consultation (“Unlocking the UK Pensions Market for Growth”) and the publication of the Interim report on the new Labour Government’s Pensions Investment review.  You can read more here.

Building on work begun by the previous Chancellor Jeremy Hunt, in the DC Consultation a proposal was put forward to establish a minimum size for multi-employer DC arrangements used for auto-enrolment. The interim report had indicated that larger schemes were better able to invest in a broader range of asset classes, including infrastructure and private equity – a behaviour that a Government with growth at the heart of its agenda has been keen to promote.

The Pensions Investment Review Final Report (the Final Report), and the response to the DC consultation (the Consultation Response) were both published on 29 May 2025.  It was noted in both that feedback from the industry demonstrated widespread support for the case for scale. In particular, there was extensive agreement that scale:

• leads to economies and efficiencies; and
• enables greater expertise and diversification in investments. 

There was further evidence that, in general, larger schemes are better able to invest in productive asset classes.

A week after publication of the Final Report and Consultation Response, on 5 June 2025 the Pension Schemes Bill was published, alongside a workplace pensions Roadmap setting out the timescales for reform.  The Bill is wide-ranging, covering reforms across the DB, DC and LGPS markets, but for the purposes of this article we will be focusing in on one specific key change, which are the requirements for DC auto-enrolment schemes to reach a minimum size. 

Who will the new scale requirements apply to?

The short answer is they’ll apply to all workplace DC schemes that are used for auto-enrolment, unless they fall into one of the exemptions.  The requirements are being implemented through a change to the conditions in the Pensions Act 2008 (PA08) for a master trust to be “qualifying scheme” for auto-enrolment purposes, and equivalent amendments to the conditions for FCA approval for a group personal pension scheme.

Like so much else in the Bill, while the Bill gives a power to make the necessary regulations (see Clause 38(4)), the details of the schemes that will benefit from the exemptions are to be set out in regulations. However, proposed new s20(1B) of the PA08 (to be inserted by Clause 38(4)) does indicate that the description of a master trust that would be exempted could include those that are:

1. designed to meet the needs of persons with a protected characteristic within the meaning of the Equality Act 2010; or
2. hybrid schemes (the Bill’s accompanying explanatory notes envisage these will be schemes for closed employer groups)

It has also been indicated that Collective DC schemes will not be subject to the scale requirements – this is set out in the Final Report.  The reasoning is that due to their nature and the requirements of authorisation, CDC schemes will naturally have a degree of scale and invest productively. However, the Government has indicated that it will keep the market under review and consider if it needs to take further steps to ensure that is the case.

What are the requirements in the Bill?

As mentioned above, Clause 38 of the Bill amends the PA08 to introduce two new conditions that a relevant Master Trust must meet in order to satisfy the quality requirement in relation to a jobholder and hence be an “automatic enrolment scheme” in relation to them.  The first of these is the scale requirement, the focus for this article. This is met if the sum of the following is more than £25bn (and any other requirements prescribed by regulations are met): 

1. the total value of assets held in funds of the relevant Master Trust; and
2. total value of assets held in funds in one or more qualifying GPP schemes (a “qualifying” GPP being one provided by the same service provider as the Master Trust in question),

provided that the funds represent accrued rights of the members of the arrangement in question, and that they are managed under a common investment strategy (meaning to be set out in regulations) 

For GPPs, the scale requirements are similar but not the same – the GPP can be approved by the FCA in respect of a ‘main scale default arrangement’ if the sum of the following is more than £25bn (and any other requirements prescribed by regulations are met):

1. the total value of assets held in the GPP; 
2. the total value of any assets held in funds of one or more other qualifying group personal pension schemes; and
3. the total value of any assets held in funds of one (and only one) relevant Master Trust,

Again, the funds must represent accrued rights of the members of the arrangement in question, and be managed under a common investment strategy (meaning to be set out in regulations). 

As has been widely reported, it is intended that the new scale requirement will apply from 2030 (see the Roadmap).

How is size measured?

An issue that was central to the DC consultation was the level at which the new scale requirement would apply.  The Consultation Response notes that most respondents felt that “any size and scale requirements should be set at the default arrangement level within a provider, rather than at an individual fund level”. This is reflected in the relevant provisions of the Bill, which provide for size to be measured at the “main scale default arrangement” level in the master trust or GPP. 

The Consultation Response concludes that:

“Having considered the responses, we believe focusing on building scale at a provider’s main default arrangement level will deliver significant investment and improved saver outcomes. We are therefore proposing an approach that moves the market towards a position where there is at least one large “Megafund” default arrangement at the centre of a provider’s proposition.”

Other than exemptions under regulations, are there any other forms of relief?

Yes, there are three other forms of relief from the headline scale requirement for schemes to consider:

• Transition pathway

This is set out in a proposed new s28D of the PA08 and will permit schemes that have not met the £25bn scale threshold by 2030 to continue to be a qualifying scheme for auto-enrolment purposes.    A relevant master trust or GPP will have to apply for approval for the transition pathway which may be given if they meet certain criteria, including:

• having a minimum total asset value of £10bn (this is set out in the Bill – draft s28D(1)-(4));
• having a “robust and deliverable plan” to grow their main scale default arrangement to £25bn by 2035 (this latter requirement is noted in the Bill’s explanatory notes and the Final Report – new s28D(5) PA08 is the provision that gives the power to make regulations to require this)

To expand a little further on the final point above, the Final Report provides that if the £10bn requirement is met, the scheme must provide the regulator with a “credible plan” to reach £25bn by 2035.  The Consultation Response also suggests other features a provider might be expected to be able to demonstrate to access the transition pathway; these dovetail with other areas of the reforms in the Bill and include: 

• having to satisfy “investment related conditions” such as a minimum level of investment in productive / UK assets; and 
• meeting governance and value related conditions, such as in-house investment expertise and good value for money assessments.

It is noted in the Consultation Response that to access the transition pathway, providers will need to make an application to the Pensions Regulator / FCA as appropriate in 2029, such application then to be determined within a timeframe to be specified. The government intends to set out the further details of the transition pathway in secondary legislation – it will be consulting with both industry and regulators “to ensure we get the details and mechanics right”.

• Innovation pathway

The Final Report recognises that maintaining innovation and competition in the market remains a critical consideration, helping ensure that competitive pressure remains a positive influence on the market and the behaviour of these bigger DC schemes.

Proposed new s28E PA08 sets out the framework for what the Bill calls “New entrant pathway relief” and states that the relevant master trust or GPP may be approved if the relevant authority determines that the scheme in question demonstrates strong potential for growth and an ability to innovate and any other prescribed conditions are met. As ever, these meanings will be set out in regulations.

• Power to temporarily treat the scheme as meeting the scale requirement

Finally, the Bill also inserts a power to make regulations which may authorise the Pensions Regulator / FCA as appropriate to temporarily treat a scheme as meeting the scale requirements. The explanatory notes set out that this facility is “expected to be used to allow the regulator to take temporary steps to minimise disruption for employers if a scheme is unlikely to reach the scale threshold at the relevant time”.

What other details are yet to be worked out?

Lots! As may be clear from the above, the Bill is very far from being the end of the story when it comes to the new scale requirements for DC auto-enrolment schemes.  There is a huge amount of important detail to come in regulations – including (but not limited to) the meaning of “common investment strategy”, how to calculate total value of an arrangement, how the value of assets is to be determined, what steps a transition relief pathway applicant might be required to take, the definition of schemes that will be exempt from the scale requirements, the definition of “main scale default arrangement” and so on. On the final point on that list, it was noted in the Final Report that the government’s objective is to ensure that the meaning of the default used for scale can be clearly understood and that it is uniquely identifiable within the industry.  The Government will engage further with industry in refining the definition of a ‘main scale default arrangement’.

What happens next?

The draft Bill will need to work its way through the Parliamentary processes – according to the Roadmap Royal Assent is slated for 2026.  Expect consultations on secondary legislation to follow, though depending on DWP capacity the scale provisions regulations may find themselves in the queue behind more immediate reforms. Nevertheless, those schemes who are aiming to reach the £25bn scale threshold (or the £10bn transition relief pathway threshold) will no doubt be engaging early with putting in place robust project plans to ensure they meet their targets.

And of course the reforms in the Bill (and accompanying secondary legislation) may not be the end of the story.  The Roadmap notes that “The government will undertake a programme of work in coming years to review the progress of this consolidation, with a specific focus on working alongside the FCA and TPR to assess whether enough has been done to reduce fragmentation within providers and that there are good reasons if smaller arrangements persist.”

These reforms are intended to consolidate the market, leading to changes for employers and savers. If a provider leaves the market, the arrangements will transfer to new providers.

If you would like any further information on any of the new scale requirements please do get in touch with Andy Prater or your usual Burges Salmon contact.