A newcomer’s guide to… the Pension Schemes Bill

Written By:

Nick Reeve
Editor
Pensions Expert

This wide-reaching legislation promises to reshape the UK retirement landscape. Pensions Expert editor Nick Reeve explores what the Pension Schemes Bill currently contains for the LGPS

The Pension Schemes Bill is one of the most significant pieces of legislation to affect the retirement industry this century. It spans defined contribution (DC) master trust governance and investment to the use of defined benefit (DB) scheme surpluses – and the Local Government Pension Scheme (LGPS) is facing significant changes too.

The bill’s first draft was laid before parliament on 5 June 2025, but many of its features have been years in the making. By the time we reach a year since MPs first saw the bill, it may well have crossed King Charles III’s desk and officially become the Pension Schemes Act 2026.

How did we get here? And where will this wide-reaching legislation take us over the next decade?

From ‘Financing Growth’ to the Pension Investment Review

In January 2024, months before then-prime minister Rishi Sunak called a general election, the Labour Party published ‘Financing Growth’, a 28-page mini-manifesto for the financial services sector setting out how it planned to leverage one of the UK’s biggest industries to drive economic growth.

For the LGPS, the message was clear – at least in hindsight. This £400 billion-plus pool of capital needed to be more cost effective, have more in-house capabilities, and be able to invest more in “productive assets”.

The report stated: “For LGPS, a Labour government will evaluate different models for pooling, including increasing in-house fund management capacity at the pool level, to deliver better returns for savers and increase investment in productive assets.”

It also targeted regional investment: “Based on the model of other pension funds, Labour will work with [the LGPS] to set out best practice for adopting similar, cost-effective in-house fund management capabilities within pools to deliver better returns for savers and create new jobs in regions and nations.”

Fast-forward a few months and under Sir Keir Starmer’s newly installed government, chancellor Rachel Reeves introduced what was to become one of the cornerstones of the Pension Schemes Bill: “megafunds”.

The focus of this new term was DC master trusts, with the government aiming to encourage a consolidated market of a few £25 billion-plus investment institutions with the ability to invest in a wide range of assets and emulate the success of similar organisations in Australia and Canada.

However, the LGPS was in Reeves’ sights too. By the time the final report of the Pension Investment Review was published in May 2025, the government had already moved to force the consolidation of the pools from eight to six, despite significant opposition from across the sector.

In his introduction to the Review’s final report, Jim McMahon – then the local government minister within the Ministry of Housing, Communities and Local Government – said the government was keen to move at pace in an effort to give “policy clarity”. This meant that, by the time legislation was in front of MPs, much of the work had already begun.

“When it comes to pensions, size matters,” said pensions minister Torsten Bell at the launch of the Pension Investment Review, “so our plans will double the number of £25 billion-plus megafunds. These reforms will mean bigger, better pension schemes, delivering a better retirement for millions and high investment in Britain.”

The bill lands and battle commences

On 5 June 2025, the Pension Schemes Bill was laid before parliament. Reeves hailed it as a “game changer”, while Bell added that “getting this right is urgent”.

For the LGPS, urgency was clear as the government had already moved to effectively shut down two pools and force their partner funds to find new homes. As far as changing the game went, that also became evident when reading through the first chapter of the bill.

Clause 1 as initially drafted gave the government sweeping powers to direct how pools invest and which pools LGPS funds could choose. While Torsten Bell insisted that this was only meant as a backstop – essentially ensuring no fund was left without a pool after the 30 September 2025 deadline for picking a new partner – others in the sector were less than comfortable with the clause’s wording.

It took until 4 September under pressure from Conservative MPs for the government to agree to remove the investment power. A spokesperson for the Department for Work and Pensions told LAPF Investments’ sister title Pensions Expert that the government “respects the longstanding independence of the LGPS and the fiduciary responsibilities of the funds and pool companies”. The other element of the backstop was also watered down, with the government required to consult before directing any fund’s pooling decisions.

Liabilities and contribution rates debated

Those focused on the private sector DB space have been discussing government plans for surplus release for some time. The Pension Schemes Bill will grant trustees the ability to return excess capital to members and/or the sponsoring employer, subject to certain conditions to be set out in secondary legislation.

This led members of the House of Lords to table two significant amendments to LGPS rules around contribution rates and liability measurements, citing the system’s strong funding position. Consultancy group Isio estimates that the aggregate funding level across the system was 145% at the end of 2025.

Last year, the London borough of Kensington and Chelsea’s LGPS committee caused a stir when it went against the recommendations of its actuary to effectively take a contribution holiday, citing the pension scheme’s exceptionally strong funding position, estimated at 207% as of 30 June 2024.

The government warned other LGPS committees against making similar decisions, but also pledged to review its rules. In March, peers added a clause to the bill allowing contribution rates to be reviewed outside of the system’s triennial valuation cycle in certain circumstances.

A separate clause requires LGPS administering authorities to include additional measures of liabilities at every actuarial valuation. Specifically, these include benchmarking liabilities against the bulk annuity market – used by private sector DB sponsors to transfer schemes to insurers – and a gilts-based discount rate.

Speaking in the House of Lords on 16 March, Conservative peer Baroness Stedman-Scott explained that the measures were intended to improve accountability and transparency around valuations.

She stated: “Where decisions are being taken which require significant contributions from public bodies, there should be transparency about how those decisions are reached, there should be honesty about the assumptions being applied and those affected should have the information necessary to exercise agency and scrutiny.”

However, Lord Davies of Brixton – a Labour peer – dismissed the measures as “nonsense”, arguing that administering authorities already had the powers they needed to make decisions on contribution rates and that actuaries only gave advice on these levels.

“If, for whatever reason, the administering authorities feel that they do not have enough control over the situation then that is a matter for them to sort out,” Lord Davies said. “It does not require legislation to say that administering authorities should do their job – it is already their job, and they should get on and do it.”

The mandation debate

While the LGPS breathed a sigh of relief at the government’s decision to step back from giving itself powers to direct investments, in the private sector, the mood was very different.

The section of the bill relating to DC master trusts contained a separate “mandation” clause apparently permitting the government to direct investment into various asset classes. Torsten Bell has doggedly defended the clause for months against a tidal wave of opposition from trade bodies, opposition MPs, and even the governor of the Bank of England.

Responding to a question from a reporter at a press conference in July 2025, the Bank’s Andrew Bailey said: “Structural changes to the pension fund industry are helpful in this respect – particularly, I think, in terms of consolidation. There are economies of scale and scope in terms of managing risky assets.

“However, I do not support mandating. I don’t think that’s appropriate… but I do hope that we can reach, through the [policy] changes, a natural ability to tackle this problem.”

Bell’s primary argument has been that the clause is designed to backstop the Mansion House Accord, a voluntary agreement struck in May 2025 between the government and 17 pension schemes and providers to invest at least 10% of investment portfolios in private markets, half of which would be in the UK. The pensions minister has cited a “collective action problem” that he believes will be solved by the threat of mandation.

However, the clause’s wording is far broader than the Mansion House Accord’s wording, and many in the industry have warned that it could easily be used to force pension schemes to invest in anything a government – be it this one or a future administration – sees fit.

In early March this year, Bell finally signalled that the government was willing to listen to these concerns, stating: “The only purpose of the reserve power in the Pension Schemes Bill is to backstop the Accord goals. We will ensure that is put beyond doubt [and] it is clear that the reserve power is only for this one purpose.”

At the time of writing, members of the House of Lords have voted to remove the clause entirely – although the government could use its majority in the Commons to overrule or reject these changes and bring in a revised mandation power.

The Pension Schemes Bill is set to reshape the UK pension system over the next decade or more, including the LGPS. And with many aspects of the legislation to be fleshed out by secondary legislation, even when the bill becomes an act, there will be plenty of work still to do.