Issues Affecting All Schemes
Budget 2026: Pensions Announcements
The 2026 Budget contained a number of pensions-related announcements. Key points include:
- The requirement for lump sum death benefits to be paid within two years of the member’s death for the payment to be tax-free (subject to the member’s lump sum and death benefit allowance) will be removed with effect from 28 October 2026.
- The definition of a serious ill-health lump sum will be changed to align it with the social security definition of terminal illness, under which the member must be reasonably expected to die within the next 12 months. The definition of a registered medical practitioner will also be amended to allow overseas medical practitioners to provide evidence of a terminal diagnosis. These changes will take effect in 2027.
- A new standalone income tax charge will be introduced on the amount by which certain lump sum death benefits exceed the deceased member’s available lump sum and death benefit allowance, rather than that amount being treated as pension income. The change will not alter the recipient’s income tax liability, but is intended to simplify tax assessment and collection. It will apply retrospectively to relevant benefits paid on or after 6 April 2024, with transitional provisions applying the same approach to relevant benefits paid in the 2023/24 tax year.
- The option for personal representatives and beneficiaries to direct schemes to pay any inheritance tax (IHT) due on lump sum death benefits will be extended to prospective personal representatives. This change will take effect from 6 April 2027.
- Changes will be made to enable DC consolidation and the introduction of guided retirement and retirement CDC schemes. These will include expanding the circumstances when a member can keep a protected pension age or protected lump sum following a transfer. The government has not stated when these changes will take effect, but the relevant legislation will not be included in the Finance Bill 2026/27.
- A new pension tax allowance will be introduced to ensure pensioners with incomes at or below the full new state pension do not pay income tax in the 2027/28–2029/30 tax years.
HMRC has published a newsletter with more detail on the announcements. The Budget also announced that the Pensions Commission will publish its final report in February 2027.
Action
Trustees and administrators should review their death benefit processes and member communications in light of the removal of the two-year rule, and factor the extension of the IHT direct payment option to prospective personal representatives into their preparations for 6 April 2027. They should also monitor the progress of the changes to serious ill-health lump sums and the taxation of death benefits that exceed the member’s lump sum and death benefit allowance.
Artificial Intelligence: Pensions Regulator Guidance
The Pensions Regulator (TPR) has published guidance encouraging trustees to explore how artificial intelligence (AI) could deliver better member outcomes, while understanding and managing the associated risks. The guidance sets out seven key principles for trustees:
- Start with the problem, not the technology;
- Human responsibility remains central;
- Governance is ongoing, not one-off;
- Plan for disruption;
- Good AI starts with good data;
- Transparency and explainability underpin trust; and
- Support fair and accessible outcomes.
For more information, please see our Legal Update, The Pensions Regulator Sets Out Seven Principles for Trustees’ Use of AI.
In addition, Pensions UK has published a report on how the pensions industry can embrace AI responsibly while maintaining clear accountability and robust governance.
Action
Trustees should review the guidance and consider whether any changes are required to their scheme’s arrangements around the use of AI.
Investment: AI Concentration Risk
TPR has published guidance to help trustees identify and manage potential hidden AI-related investment exposure. It sets out steps for trustees to take to ensure they understand their scheme’s aggregate exposure, and to test whether diversification will remain effective under stressed market conditions. TPR expects trustees to:
- Assess their total portfolio exposure, including direct and indirect AI-related exposure across asset classes;
- Use scenario analysis to test portfolio resilience under severe but plausible stressed market conditions;
- Review whether diversification would remain effective if correlations changed during a market downturn;
- Challenge investment advisers and managers on how market developments could affect the scheme’s investments and objectives; and
- Take proportionate action that reflects the scheme’s circumstances.
Action
Trustees should discuss the guidance with their investment advisers and consider whether any action is needed in relation to their scheme’s investments.
Cyber Security: Guidance on PHP Security Issue
The National Cyber Security Centre has published guidance for organisations on mitigating the impact of the PHP security issue. PHP is a programming language in which a security flaw was recently identified which may allow hackers to execute commands on any web server running PHP. The guidance sets out a list of priority actions that organisations should take.
Action
Trustees and administrators should seek confirmation from their administrators and other service providers that they have considered the guidance and taken any necessary steps.
Pensions Dashboards: Updated Draft Reporting Standards
The Pensions Dashboards Programme (PDP) has published a further updated draft of its new reporting standards (version 2.3). The new version makes minor clarifications to the previous draft (version 2.2). The new standards are awaiting approval from the Secretary of State for Work and Pensions before they become legally binding. In the meantime, the previously approved version (version 2.0) remains legally binding. The PDP has also published a blog post on the updated draft standards.
In addition, the Pensions Administration Standards Association has published guidance on resolving “possible” dashboard matches. A possible match occurs where the information supplied through a dashboard indicates the user may be a scheme member, but further checks are needed to confirm this. The guidance covers contact routes, identity checks, communicating outcomes, handling unresolved cases, data protection, and monitoring. It also notes opportunities to improve underlying data quality through the resolution process.
Action
Trustees and administrators of schemes that are subject to the dashboards requirements should ensure that their arrangements for complying with the daily reporting obligation from March 2027 are updated to reflect the revised draft standards.
Trustee Focus: TPR Expectations
In a recent speech, TPR’s CEO set out its expectations for trustees’ future focus. Key points include:
- DB trustees should decide their scheme’s endgame. At a minimum, they should set a long-term objective, assess all available options, and challenge whether their current governance structure remains fit for purpose.
- DC trustees should decide whether they can meet the new value for money (VFM) and guided retirement requirements under the Pension Schemes Act 2026 or whether consolidation would better serve members. Those choosing not to consolidate should consider any governance changes needed to meet the requirements.
Action
No action required – this is for information only.
Issues Affecting DB Schemes
Pension Protection Fund: 2027/28 Levy
The Pension Protection Fund has announced that it will charge a zero levy for conventional schemes in 2027/28. It will also pause the levy for alternative covenant schemes for a year.
Action
No action required – this is for information only.
Issues Affecting DC Schemes
Future of DC Pensions: TPR Expectations
In a recent speech, TPR’s Chair outlined its future expectations for DC pension schemes in the future. Key points include:
- Contribution levels, followed by performance net of fees, have the greatest impact on member outcomes. VFM assessment has historically focussed too much on fee levels – the new framework will focus on performance net of fees as well as including forward-looking metrics. While schemes will conduct their own VFM assessments, TPR and the Financial Conduct Authority will check those assessments. TPR will consult on a code of practice for conducting VFM assessments.
- Most members will continue to follow the default options for contribution rates, investment funds, and retirement choices. Trustees should consider factors such as housing, health, family circumstances, and other sources of wealth when designing defaults suited to member needs.
- TPR expects megafunds to dominate the DC market in 10 years, with the scale, governance, investment expertise, and operational resilience to invest more effectively and deliver better long-term value. They should also have the investment governance and risk management systems to be able to invest in productive assets and support UK growth where this is in members’ interests.
Action
No action required – this is for information only.
Mayer Brown News
Recent Work
Tom MacAulay, Amy Bennett and Henry Corrigan advised Canada Life Re on the novation of longevity reinsurance arrangements in connection with a £1.7 billion buy-in between the Trustee of the UBS (UK) Group Pension Plan and Legal & General, the largest announced UK pension risk transfer deal of 2026 to date.
Updates
Henry Corrigan and Gareth Davies presented a session on trustee duties, legal responsibilities and surplus decision-making at the Pensions Management Institute’s Endgame Solutions Conference on 6 October 2026. Their session explored how to navigate surplus benefit improvement discussions while protecting member outcomes. This included managing conflicts, taking appropriate advice, reaching robust decisions which fulfil legal duties, and evidencing the decision-making process.
Insights
- Insights: Employment | Benefits | Mobility – Q3 2026 | Insights | Mayer Brown
- Release of Surplus From DB Pension Schemes: Proposed New Rules | Insights | Mayer Brown
- UK Government Announces Consultations On "Resurrecting" Pensions | Insights | Mayer Brown
- The Pensions Regulator Sets Out Seven Principles for Trustees’ Use of AI | Insights | Mayer Brown
View all our Insights.
