UK Pensions: A period of profound transformation

Foreword

Looking ahead, the pensions market is set for change in 2025. We are looking at some of the biggest opportunities and risks shaping the pension’s field. The UK defined contribution (DC) market could become more dynamic and competitive due to growing pot sizes and consolidation. The defined benefit (DB) market will focus on strong funding levels, end-game strategies, and risk reduction. Likewise, the Local Government Pension Scheme (LGPS) is transforming through government-backed consolidation efforts, pooling assets into larger structures.

Defined Contribution (DC) pensions outlook: Trends shaping 2025

Mary Cahani, Head of Defined Contribution Clients

The UK DC market is undergoing a period of profound transformation, a trend set to continue in 2025. For decades, DC schemes operated effectively as passive investments, largely managed within HR departments. However, as pot sizes grow and consolidation accelerates, the market has evolved into a dynamic and competitive landscape. Collaboration is also emerging as a key theme across the industry as stakeholders—including advisors, asset managers, platform providers, and regulators—are increasingly working together to improve member outcomes.

Increasingly, smaller DC schemes are being absorbed into master trusts to achieve greater scale and deliver value for money. This trend is expected to intensify, with master trusts utilising their size to negotiate lower fees while striving to enhance member outcomes. Regulators are pushing schemes to demonstrate their value, setting the stage for a more competitive environment among providers.

Portfolio enhancement is another critical trend. While passive exposures in public assets remain a cornerstone, DC schemes are pursuing alternative investments and sustainability frameworks to deliver better outcomes. The integration of alternatives—facilitated by structures like Long-Term Asset Funds (LTAFs)—is gaining momentum, as schemes balance the need for liquidity with opportunities to diversify portfolios and capture higher returns. Environmental, social, and governance (ESG) considerations are also becoming integral, as schemes work to align investments with members’ sustainability goals.

Fee pressures remain a challenge as master trusts compete for market share. The drive to offer cost-effective solutions is coupled with a growing demand for flexibility in post-retirement strategies. Solving for post-retirement will be pivotal in 2025, requiring innovation in blended solutions that combine income, growth, and cash-ready propositions. Whether it’s through guided, advised, or default frameworks, the focus is on granting members access to tailored solutions that meet their unique needs.

Looking ahead, the continued push for consolidation, innovation in portfolio composition, and progress in post-retirement solutions will shape the DC market in 2025.

Local Government Pension Scheme (LGPS) Outlook: 2025

Stephen Messenger, Head of UK Strategic Institutions

The Local Government Pension Scheme (LGPS) is undergoing another iteration of its metamorphosis, fueled by government-backed consolidation efforts, evolving investment priorities, and a new administration with an even keener focus on supporting the UK’s economic growth via UK pension assets.

This will remain at the forefront of the LGPS agenda for 2025. The UK government is increasing its efforts to pool assets, drive economies of scale and unlock greater capacity for UK based investments with the aim of enabling LGPS funds to deliver more substantial contributions to initiatives supporting regional development, infrastructure, and housing, in line with the government’s broader economic growth objectives.

This signposted strategic re-organisation for pools to reach a critical mass of £50 billion by 2030, will require some sizeable shifts across the pension scheme.  

From an investment perspective, funding improvements, cashflow requirements and shifting priorities will continue to drive schemes to reduce their reliance on equities and allocate more toward private markets and yield generative assets such as credit. Assets such as direct lending, real estate debt, and infrastructure provide attractive cash flow profiles, diversification benefits, and alignment with long-term sustainability goals. These shifts are motivated by a need to generate enhanced income to meet pension obligations, while simultaneously (where possible) to contribute to impactful projects such as housing of varied tenures, social infrastructure, and green energy.

Defined Benefit (DB) pensions outlook

The UK’s defined benefit (DB) pensions market in 2025 will be shaped by continued strong funding levels, shifting end-game approaches, and risk reduction.

The change in interest rate regime has accelerated DB schemes funding positions following years of deficits. With these improved funding positions, the focus for corporate DB schemes has shifted toward “endgame” solutions. For most, this means transferring liabilities to insurers through risk transfer. However, a growing number of sponsors may start to reconsider the traditional offloading path, as opportunities to unlock surpluses become clearer, more may decide to “run-off”.

In regard to investment, de-risking will continue to the main trend with increased allocations to high-quality credit, government bonds and winding down or shortening the duration of private market assets.

Looking ahead, 2025 will see DB schemes balancing de-risking efforts with opportunities to optimise outcomes for both sponsors and beneficiaries, taking into account any potential risks to funding and the desired end game.