The Pension Schemes Act 2026: What Trustees and Employers Need to Know

The Pension Schemes Act 2026 ("PSA 26") has now received Royal Assent, marking another significant step in the ongoing reform of UK pensions. It introduces a broad range of reforms across defined contribution ("DC") and defined benefit ("DB") pension arrangements.

This note has been produced for trustees and employers to highlight the most relevant developments in pensions law and what they are likely to mean in practice.

Executive Summary

The PSA 26 is likely to have a more direct impact on employers than earlier pensions reforms, particularly where they are responsible for selecting, monitoring or funding workplace pension arrangements. Although much of the detail will follow in regulations and guidance, employers should expect closer scrutiny of whether their chosen pension provision delivers good value, is administratively robust and remains suitable for their workforce over time.

For employers using defined contribution schemes, the main implications are likely to be greater engagement with the new Value for Money framework, possible pressure to review provider choice if a scheme is seen as too small or underperforming, and the need to understand how scheme consolidation, small pot reforms and guided retirement solutions could affect employee experience. For employers with defined benefit arrangements, the changes on surplus extraction may create opportunities to access capital, but only where trustee support, prudent funding and appropriate scheme resilience are in place.

In practical terms, employers should now start reviewing the quality of their current pension offering, the strength of scheme governance and administration, data quality, member communications and retirement support, as well as any strategic implications for reward, retention and workforce planning. The PSA 26 does not require immediate wholesale change, but it does point towards a regime in which employers will be expected to take a more active and informed role in how workplace pension provision is assessed and maintained.

Value for Money Framework

One of the most significant changes is the formal introduction of a statutory Value for Money (“VFM”) framework for DC schemes.

The VFM framework focuses on providing a complete picture of whether workplace DC schemes are delivering good outcomes for savers. The aim has been to create a more consistent basis for comparing schemes across investment performance, costs and service quality, while also using greater transparency to drive improvement and, where necessary, consolidation.

The legislation:

• Creates a duty to formalise the VFM framework;
• Requires regulations to define metrics and standards against which schemes will be assessed;
• Enables consequences for unperforming schemes, including potential consolidation.

The underlying intention of the policy is clear in that the focus is shifting from short-term cost to longer-term overall member outcomes, such as:

• Investment performance;
• Administration quality;
• Data accuracy and communications.

In practice, this is likely to mean:

• Employers selecting schemes, particularly for automatic enrolment purposes, will be expected to engage more proactively with the VFM framework and associated outcomes;
• Trustees will need to be able to evidence value across a broader range of factors – not just cost;
• Poorly performing schemes may face pressure from the Pensions Regulator to consolidate or wind-up.

This is likely to become one of the most scrutinised areas of governance once the regulations come into force.

Scale and Consolidation Requirements

The PSA 26 introduces provisions aimed at driving scale in DC schemes, particularly in master trusts.

The policy rationale is that larger DC schemes are generally better placed to achieve economies of scale, invest more efficiently and support stronger governance and administration. Government and regulators have also linked scale to a greater ability to access a wider range of asset classes, including private markets, and to deliver better long-term outcomes for members through improved investment capability and lower per-member costs.

• Clause 40 of the PSA 26 introduces legislative changes that:
• Establish conditions linked to scale and asset thresholds for default arrangements;
• Allow regulatory intervention where schemes fail to meet the required standards;
• Form part of a broader policy push towards market consolidation.

Although this area was subject to heavy amendments during the legislative process, the underlying objective remains the same. Smaller or underperforming schemes will increasingly be expected to consolidate.

The practical impact of this means that:

• Trustees of smaller schemes will need to actively assess long-term viability of the scheme on an ongoing basis;
• Employers may be faced with the decision of seeking an alternative provider;
• Governance processes should actively consider whether remaining a standalone scheme is in the members’ best interests.

Small Pots and Automatic Consolidation

The PSA 26 makes provision for automatic consolidation of small deferred pension pots. This has been a long-standing policy objective.

Whilst we await the details that will be set out in regulations, the PSA 26 aims to reduce administrative burden and improve outcomes for members. It creates the framework for pot consolidation whilst giving members control over what happens to their benefits.

Trustees and employers can expect:

• Changes to be required to system and administration processes;
• An increased focus on data quality and member matching.

Guided Retirement and Decumulation Duties

The PSA 26 introduces a stronger expectation that schemes will support members when it comes to retirement, rather than leaving them to navigate their options on their own.

The PSA 26 expects schemes to develop a framework for default or guided retirement solutions that moves away from purely set decumulation options that are not tailored to the member’s needs.

Trustees will need to consider decumulation strategies as part of their core governance. For employers, this may mean facing more questions from members about retirement options within workplace pension schemes.

Investment Powers

One of the most debated aspects of the PSA 26 is the inclusion of a reserve power to allow the government to direct investment into certain asset classes.

Following much debate in Parliament, the original provision has been amended so that any mandated investment will be capped, for example, at 10% of a scheme’s default funds. It is also time-limited, cannot be used immediately, and applies only to default automatic enrolment funds.

The asset classes most commonly discussed in this context are infrastructure, private equity, venture and growth capital, and other private market investments that are seen as capable of supporting long-term economic growth. The policy case for focusing on these assets is that larger pension schemes may be better able to access them, offering greater diversification and the potential for higher long-term net returns for savers, while also directing capital towards UK businesses, energy transition projects and other forms of so-called productive finance.

In practice, whilst the power exists and trustees are likely to be wary, it is restricted and may never be used. Trustees should nevertheless be prepared to justify their investment strategy decisions, particularly in UK growth assets.

Environmental, Social and Governance (“ESG”)

In relation to ESG, the PSA 26 expands the regulatory perimeter around sustainability risks, including biodiversity.

It introduces new provisions to allow regulations to be drafted that require trustees to publish information on biodiversity risk impacts. Again, this builds on existing climate requirements which signals a continued expansion of trustees’ ESG obligations.

Trustees should expect broader disclosure requirements to be brought in over time, with the need to evidence the integration of ESG factors rather than purely reference them.

Payment of Surplus

The PSA 26 introduces greater flexibility around releasing surplus in a DB scheme to sponsoring employers. The relevant provisions amend the existing structure under the Pensions Act 1995 to make it easier, in certain circumstances, for trustees to agree to make payments to employers from a scheme’s surplus, where funding levels exceed scheme liabilities. In particular, the PSA 26 provides a clearer statutory basis for payment of surplus, subject to controls designed to protect member benefits by ensuring schemes remain well funded on a prudent basis.

In practice, this is likely to bring a renewed focus to questions around funding targets, actuarial margins and trustee discretion.

Trustees will need to balance the interests of members and sponsoring employers carefully, while employers may see increased opportunity to access capital. Both trustees and employers should understand that robust justification and appropriate funding resilience are still required.

Summary

In summary, the PSA 26 is not a radical overhaul of the pensions system that will happen overnight, but it does materially raise expectations in terms of governance and risk.

The key themes are:

• Accountability;
• Scale and consolidation;
• Better member outcomes, especially at retirement.

For trustees, the priority is clear. They must ensure governance processes can stand up to evidence-based scrutiny.

Employers can be expected to have greater engagement with the quality of their pension scheme provision and a closer alignment with the outcomes for the workforce.