Insights for In-house Counsel Spring 2026 - Pensions

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Pension contributions made via salary sacrifice

If I were a GC, here's the one topic that would be top of my radar in the next 6 months:

The Government's plans to cap National Insurance contributions tax relief on pension contributions made through salary sacrifice from April 2029 which could significantly increase your future payroll costs.

Why it matters:

At the Autumn Budget 2025, the Chancellor confirmed that National Insurance contributions (NIC) tax relief on pension contributions made through salary sacrifice will be capped from April 2029. Salary sacrificed pension contributions above £2,000 will be subject to employer and employee NICs, like other employee pension contributions. With employer NICs now standing at 15%, this will increase costs for those businesses who use salary sacrifice for pension contributions, particularly where employers currently share their NIC saving with employees.

Our view:

The Government's primary legislation introducing this change has met opposition in the House of Lords. Much of the detail will be contained in regulations which have yet to be published. However, from what we know so far, it appears that any agreement under which an employee has a choice between cash and pension contributions will be caught, meaning that flexible benefit and cash allowance packages will be impacted as well as traditional salary sacrifice agreements. The proposal will particularly impact mid to high earners. There will likely be some behavioural change from both employers and employees. Employers may look elsewhere to offset the increased costs, whether that be through limiting pay rises, reduced recruitment or lower levels of business investment. Employees may reduce their pension savings to increase take home pay. Significantly, the change further risks member confidence in pensions savings, at a time when we have an ongoing Pensions Commission review into pensions adequacy.

Investigate the future increased cost to your business and consider how this will be met, particularly where any saving in employer NICs is shared with employees.
Keep an eye on developments as the Bill progresses through Parliament and the accompanying regulations are published.
Once the detail is confirmed, review employee remuneration packages to consider whether any changes need to be made, implement required changes to payroll systems and update employee communications.

Releasing surplus in defined benefit pension schemes

Why it matters:

Improved funding levels since the Kwarteng/Truss 2022 mini budget has meant that many defined benefit (DB) pension schemes are now in surplus. The Pension Schemes Bill contains provisions to make it easier for employers to access surplus from an ongoing DB scheme, which are expected to come into force by late 2027. This will likely include the potential for employers to have surplus returned to them from schemes that are fully funded on a low dependency funding basis, which is a lower funding basis than the current buy-out basis offering employers greater opportunities to access any trapped cash.

Our view:

We welcome the additional flexibility and choice that will be available to employers once these changes come into force. Regulations detailing the conditions that must be met before surplus can be released to employers are yet to be published and will be subject to consultation. The Pensions Regulator is already encouraging scheme trustees to develop and agree a surplus sharing framework with employers. Options currently available to access surplus including using it to fund future employer pension contributions, transferring it to another scheme (including to commercial master trusts) and augmenting (or not augmenting) member benefits.

Keep an eye on developments as the Bill progresses through Parliament and the accompanying regulations are published.
Seek legal advice on the various considerations, risks and opportunities that may arise when developing and documenting a surplus sharing framework with DB scheme trustees.

Pension scheme investment in private markets

Why it matters:

Included in Pension Schemes Bill is a reserve power effectively to force £25bn+ master trust and Group Personal Pension funds to invest a proportion of their assets in particular asset classes, including in the UK. The power is highly controversial and has recently been voted down by the House of Lords but is likely to be reinserted in the Commons. The Bill currently says that qualifying assets "may for example be" private equity, private debt, venture capital or interests in land but excludes investment in such assets through listed investment companies. The drafting seems fundamentally misguided and, if it remains in the Bill, industry groups are campaigning to have it amended to allow schemes to use a range of vehicles, including listed investment companies, to fulfil the mandation requirement. In the absence of such an amendment, there is a risk that pension trustees may move away from investing in such vehicles to meet their Mansion House commitments.

Our view:

There appears to be a fundamentally confused division in the current drafting between the concept of "private markets" and the concept of "listed liquid assets" despite the fact that you can access the former through the latter. As raised in the House of Lords debate, what the Government is doing is difficult to justify by permitting (for these purposes) access to the same types of assets through certain fund structures (e.g. LTAFs) and not others (e.g. listed investment trusts). This arbitrary distinction between the use of listed and unlisted vehicles for investments in the same types of assets is unhelpful as there may be good reasons why pension arrangements would prefer to invest via a listed fund (not least if liquidity is an issue). We hope the Government will respond to calls for amendments.