Recommendation 2

HM Government Acknowledged

The State Pension provides a secure foundation for retirement and any saving into a private pension will build on this. Automatic enrolment has been hugely successful in addressing under-saving, with more than 11 million workers enrolled into workplace pensions by November 2024, and the participation rate of eligible employees in the private sector increasing from 42% in 2012 to 86% in 2023. Around £132 billion was saved into workplace pensions for eligible individuals in 2023. The Government is committed to making further changes to enable tomorrow’s pensioners to have security in retirement. This is why we announced the landmark Pensions Review days after coming into office in July 2024. The second phase of this review will explore longer term 3 Please see: Office for National Statistics (ONS), The Pensions Regulator (TPR) and Pension Protection Fund (PPF) issue joint statement on defined benefit pension scheme data 4 https://www.ppf.co.uk/-/media/PPF-Website/Public/Purple-Book-Data-2024/PPF-The- Purple-Book-2024.pdf challenges, including retirement adequacy, to ensure our pensions system is fit for the future. We will set out the full scope and timetable for the second phase in due course. Most of those saving into an automatic enrolment pension scheme will be saving into a defined contribution scheme. Through the forthcoming Pensions Schemes Bill we intend to make value for money the foundation of all defined contribution pension schemes. However, the government does not specify the type of pension that employers should offer their employees as part of their remuneration package, provided they meet the minimum standards set by law. There are billions of pounds in surplus funding in private sector occupational DB pension schemes. These schemes continue to be used by many employers to provide quality pensions for large numbers of present and future pensioners. Within the new DB funding regime, we have sought to achieve an appropriate balance between employer affordability and member security for open DB schemes. We continue to ensure DB pensions remain properly protected, that schemes have ways of managing and securing the liabilities of their closed schemes, and that open DB schemes can continue to thrive, alongside other choices for employers. We also recognise there is an opportunity for the assets held by these schemes to bring greater benefit to employers, scheme members, and the wider economy. We will pave the way for well-funded DB pension schemes to share surplus funds with sponsoring employers and members. Bringing forward these flexibilities can fuel growth, provide benefits for the economy and ensure members remain protected, with stringent funding safeguards. The Scheme Funding Regime When the original 2005 scheme funding regime was implemented, there were more open DB schemes than there are now. The legislation was framed in terms of schemes operating in a steady state - there were no requirements to consider the effects of increasing maturity, nor to plan for end game strategies. The regime was extremely scheme-specific and flexible - this was one of its strengths, but also one of its weaknesses. While most schemes were operating effectively, some were not. TPR found it difficult to impose standards to protect members and the PPF, as the requirements lacked sufficient clarity for enforcement. This was brought into sharp focus by several high-profile insolvencies of companies with underfunded DB pension schemes. These caused widespread concern and threatened to undermine confidence in the funding regime. While the 2018 White Paper, ‘Protecting Defined Benefit Pension Schemes’ concluded there were no systemic problems with the regime, it did recommend that the system be improved for members, trustees and employers by introducing greater clarity on scheme funding principles. Whilst higher interest rates have driven an improvement and an aggregate surplus in DB funding in recent years, just under a fifth of schemes remain in deficit on a technical provisions basis. The new scheme funding code was designed to ensure the security and sustainability of DB pensions by building on the existing regime and was refined by the Department for Work and Pensions (DWP) and by TPR through extensive discussion and consultation.