EQ Retirement Solutions Year In Review

In This Article:

• A ‘soft landing’ for the global economy?
• The year of the election… A new Government on home turf…
• Inherited pension pots subject to IHT
• Other pension announcements in the Budget…
• New investment plans and the Pension Investment Review
• The ‘megafund’ model
• A ‘fresh approach’ to the DB market
• Key issues and trends for pension schemes and trustees
• Looking ahead

During 2024, key themes such as AI, climate, energy, elections and global security dominated. Global fragmentation was also a prevalent theme identified at the Davos World Economic Forum in January, where United Nations Secretary-General Antonia Guterres commented,

A ‘soft landing’ for the global economy?

With geopolitical instability posing a risk to global and domestic growth, the International Monetary Fund’s (IMF’s) recent World Economic Outlook entitled ‘Policy Pivot, Rising Threats,’ outlines global growth expectations of 3.2% in both 2024 and 2025. The international soothsayer predicts that rate cuts are ‘poised’ to continue, inflationary pressures will ease, growth will be modest, while geopolitical risks ‘remain threats to global stability and growth.’

In November, finance leaders and central bank governors from developed and emerging economies met in Washington to discuss the financial landscape, during which they issued a statement expressing optimism, ‘We observe good prospects of a soft landing for the global economy, although multiple challenges remain.’ Praising ‘well-calibrated monetary policies’ that have helped to control inflation, the finance professionals spoke about a joint commitment to resist protectionism to support fair and open global trade.

The year of the election… A new Government on home turf…

Almost half of the world’s population voted in national elections in 2024. Such a significant theme in the year, political transitions pose a challenge both globally and on home shores. 

Following weeks of intense campaigning, as widely expected, the Labour Party secured a landslide victory in July. New Chancellor Rachel Reeves’ maiden Budget in October created waves for individuals and businesses alike, during which she announced £40bn of tax rises.

Described as a ‘tough’ Budget for business, the announced increase in employer National Insurance Contributions from April 2025 brings an unwelcome cost burden. The Government held firm on its manifesto pledge to maintain the State Pension Triple Lock.

Inherited pension pots subject to IHT

From a pension perspective, the most significant change was the announcement that most unused pension funds and death benefits payable from a pension will be brought into a person’s estate for Inheritance Tax (IHT) purposes from 6 April 2027. A significant change, this will prompt some rethinking of retirees’ decumulation strategies as people focus on using their pension for retirement income rather than estate planning purposes. The Chancellor expects 8% of estates will be impacted annually. 

Nigel Peaple, Chief Policy Counsel at the Pensions and Lifetime Savings Association (PLSA), said,

Other pension announcements in the Budget…

The Government removed the exemption from the ‘overseas transfer charge’ that applies when members of UK-registered pension schemes transfer to ‘qualifying recognised overseas pension schemes’ (QROPS) in the European Economic Area (EEA). For EEA pension schemes, the Government will bring in line the conditions of Overseas Pension Schemes (OPS) and Recognised Overseas Pension Schemes (ROPS) established in the EEA, with OPS and ROPS established in the rest of the world from 6 April 2025. 

In addition, the Government will require scheme administrators of registered pension schemes to be UK resident from 6 April 2026. The Government will transfer the Investment Reserve Fund, worth an estimated £1.6bn in the Mineworkers’ Pension Scheme, to the scheme’s trustees. They will also take forward a review of existing surplus sharing arrangements.

New investment plans and the Pension Investment Review

The Government announced it had plans to work in partnership with the private sector to further increase investment, which will include launching a Pensions Investment Review designed to ‘unlock more pension fund investment into UK growth assets’ - which paved the way for the Mansion House speech in November…

The ‘megafund’ model

Rachel Reeves used her first Mansion House speech to outline her new plan for pension funds, intended to shake up UK pension saving and unlock £80bn of investment. She revealed that the Government is backing a ‘megafund' model to revolutionise UK pension saving. Based partly on similar schemes in Canada and Australia, this will involve merging the UK's existing 86 Local Government Pension Schemes and Defined Contribution Schemes. The result, according to Ms Reeves, could be about £80bn of investment in new businesses and critical infrastructure, with larger funds better placed to invest in assets that have higher growth potential. 

The reforms will be introduced through a new Pension Schemes Bill in 2025.

The UK already has one of the largest pension systems in the world but the present system spreads assets between many different funds. The new plan seeks to make the most of another finding: that funds holding more than £50bn in assets can reap the greatest rewards, for example the ability to invest directly in large scale projects at lower cost.

A ‘fresh approach’ to the DB market

The Work and Pensions Committee (WPC) shared its recommendations for the DB pension market in March 2024, urging that a ‘fresh approach’ is needed for the treatment of surpluses in DB pension and compensation schemes, and funding regulation. Secretary of State for Work and Pensions, Liz Kendall, confirmed the Government is working to provide a response to the WPC report on defined benefit (DB) pensions in 2025.

Key issues and trends for pension schemes and trustees in 2024

2024 saw some major changes to pensions law, with the abolition of the Lifetime Allowance from 6 April and two new types of lump sum allowance introduced. As well as the introduction of the new funding regime for defined benefit schemes, broader market trends included:

• The return of scheme surpluses – driven by long-term gilt yield rise and drop in liabilities. The tax charge applicable to authorised surplus repayments reduced from 35% to 25% from 6 April 2024. Pension scheme surpluses (either current or potential) has prompted advice on the accounting treatment of surpluses
• The trend towards more scheme buy-outs continued in 2024 as schemes move toward and focus on ‘end game’ strategies
• Pensions-related cyber-attacks continued to target pensions data in 2024, with data protection and cyber-security safeguards increasing in importance, and pension scheme trustees and scheme management focused on how to manage cyber risk to schemes
• The Pensions Regulator's (TPR’s) General Code of Practice, published in early 2024, consolidated various existing codes of practice and also set out the Regulator's expectations in relation to trustees' governance processes to ensure pension funds are run properly
• The new Government reaffirmed commitment to the Pension Dashboard in the Autumn and updated standards and connection guidance. Emma Reynolds MP, commented, “Everyone should feel confident about their retirement, and pensions dashboards will be a game changer for retirement planning, promoting greater engagement, which in turn could promote greater outcomes.” The Department for Work and Pensions (DWP) has set out a staged timetable for schemes to connect, with all schemes in scope to be connected by 31 October 2026
• The bulk purchase annuity market hit ‘record’ number of transactions in H1, highlighting demand for bulk annuities. The sub-£100m market experienced significant growth over H1, representing 83% of transactions completed. H2 has been busy too, dominated by a number of deals of £1bn and over, with a strong pipeline going into 2025. BPA remains a key method for many schemes, in light of strong funding levels and attractive insurance pricing, DB pension schemes are increasingly looking for ways to de-risk their liabilities and secure their members’ benefits
• The unfolding longevity ‘mega-trend’ is a global issue as populations age and it is necessary to fund longer retirements. Longevity risk is a significant challenge for most DB pension schemes and has become increasingly important in assessing the overall risk profile of schemes as discount rates have fallen and liabilities have increased. Schemes are increasingly having to take action to manage longevity risk, with trustees exploring new and innovative solutions for managing longevity and mortality risk, whatever the size of their scheme.

- all trends set to continue, unfold and develop further into 2025.

Looking ahead

As a new year dawns and we ponder what the next 12 months may hold - some familiar global economic challenges lie ahead. The IMF cites a period of ‘stable but underwhelming’ global growth for the year ahead. The update also predicted a return to a more neutral monetary policy stance as inflation in most economies steadily falls towards target in 2025.

The report acknowledged ‘exceptional’ levels of uncertainty, which Donald Trump’s subsequent return to the White House has done little to ease, with a return to US protectionism and the prospect of trade feuds certainly posing a threat to the global economy.

Today’s world is unpredictable, we can you help take control and face the future with confidence…