HR pensions spotlight: what should UK employers look out for in 2025?

As the UK government continues its broad programme of reform, here are some of the main pensions-related developments that employers will need to look out for and action in 2025.

DB schemes

Employers with defined benefit (DB) schemes need to prepare for the new scheme funding rules that will apply to any valuation with an effective date on or after 22 September 2024. Those with discretionary powers to increase pensions should also give careful thought to the question of whether (and if so by how much) to increase pensions in payment, particularly those earned before April 1997, which (except for any Guaranteed Minimum Pension payable in respect of contracted-out employees) are not increased by law.

Pensions review

All employers should follow the next steps in the government's pensions review and the November 2024 consultation on changes to the defined contribution (DC) pensions landscape. The November consultation includes a proposal to introduce a new duty for employers around ensuring that pensions provide value for members and plans to limit the number of and set a minimum size for automatic enrolment default funds or arrangements operated by DC master trust or group contract-based scheme providers. If the government proceeds with these ideas, employers will see a change in their duties. They could also see a reduction in the number of providers and changes to default funds or arrangements that could affect both DC master trust or group personal pension plans (GPP) already in place for their staff, and any plans they have to move to a DC master trust or GPP for future pension provision.

Increase in the normal minimum pension age

This year might bring the transitional provisions for the increase in the normal minimum pension age (NMPA) from 55 to 57 on 6 April 2028. The NMPA is the earliest age at which members in good health can take their benefits without breaking pensions tax rules. Employers might like to liaise with providers and pension scheme trustees to check how this change will affect their workforce. Will all employees see their minimum pension age increase to 57, or will some retain a "protected pension age" of 55. Employers will want to understand what providers and trustees are saying to members.

Inheritance tax treatment of pensions and death benefits

Draft legislation for the planned change to include death benefits and any "unused" DC funds in a member's estate for inheritance tax purposes from April 2027 is also expected this year. At the moment, the impact on DC and DB schemes is reasonably clear, but there are some questions, including on whether insured lump sum death benefits paid from DB or death-in-service only schemes will be caught by the change. Once the draft legislation has been released, the position should be clearer. If death-in-service only schemes are caught, then employers may wish to take advice on whether they can address inheritance tax concerns by providing benefits through an excepted group life arrangement.

Dismiss and re-engage

It is sometimes necessary for employers to consider dismiss and re-engage as a last resort if contracts of employment give rise to pension rights that the employer needs to change and the employees will not, or will not all, agree to the change. This can, in turn, trigger a requirement to consult on collective redundancy. A new code of practice on dismiss and re-engage came into force last year, but the Employment Rights Bill and an October 2024 consultation spell further change and employers should follow developments..

Salary sacrifice

For employers who do not already use it, salary sacrifice (where an employee gives up part of their pay in return for an equivalent additional employer pension contribution, and neither the employer nor the member pay National Insurance Contributions (NICs) on the pay given up) might provide a way of offsetting the upcoming increase in employer NICs. Employers who have already introduced salary sacrifice might consider taking advice on extending it, or on whether it is possible to revisit any agreement to share the NIC saving with members.

Collective money purchase

And, finally, 2025 could bring draft regulations to change the law to allow the creation of collective money purchase (CMP) master trusts. CMP is a new type of pension scheme where trustees invest contributions to provide members with a target (but not promised) benefit. At the moment, it is only accessible to the largest employers who can set up a scheme of their own. If a master trust model is permitted, CMP could provide a way for employers to offer their staff greater pension certainty and less need for decisions than a DC pension, without the funding promise of a DB scheme.

Osborne Clarke comment

For DB schemes we hope that this year will also bring confirmation of whether the government intends to proceed with three proposals launched by its predecessor: changing the rules on use of surplus in an ongoing scheme, establishing a new DB consolidator scheme administered by the Pension Protection Fund, and the 2021 plans to reform the employer notifiable events (events that DB scheme employers must notify to the Pensions Regulator).

All employers should also look out for an update on the expected timing of the launch of stage two of the government's pensions review. Stage two is expected to focus on retirement adequacy and to include a review of the scope and minimum contributions for automatic enrolment. It was due to start in 2024, but has been delayed. Some press reports suggest that the delay could be because the government is reluctant to suggest any further increase in employer costs at this time, but it is worth remembering that phase one of the review is still underway and not expected to conclude until the spring of this year.