What the Pension Schemes Act changes for employers

The Act introduces several provisions that alter the landscape of workplace pension governance and contribution structures. Among the most significant for operators are the expansion of collective defined contribution (CDC) schemes beyond single-employer or connected-employer arrangements, new trustee governance standards, and amendments to the auto-enrolment framework.

CDC schemes pool investment and longevity risk across members, offering a target retirement income rather than the individual pot model of standard defined contribution (DC) schemes. Until now, CDC provision has been limited; Royal Mail's scheme, established under the Pension Schemes Act 2021, remains the only operational example in the UK, according to The Pensions Regulator (TPR). The new Act opens the door for multi-employer and industry-wide CDC arrangements, meaning SMEs could, in principle, participate in shared schemes without bearing the full governance burden alone.

On auto-enrolment, the Act lays the groundwork for lowering the age threshold from 22 to 18 and removing the lower qualifying earnings band (currently £6,240 per year, according to the Department for Work and Pensions). These changes, first legislated for in the Pensions (Extension of Automatic Enrolment) Act 2023, are now given a clearer implementation path. The practical effect is that more workers will qualify for employer contributions from the first pound earned.

New trustee standards require scheme trustees, or those performing equivalent governance roles in contract-based schemes, to meet fit-and-proper-person tests. Employers who act as sole trustees of smaller occupational schemes will need to demonstrate compliance with these requirements.

Compliance timeline and key deadlines

Royal Assent marks the Act's formal entry onto the statute book, but most provisions will not take effect immediately. Secondary legislation, in the form of statutory instruments, will set specific commencement dates. The DWP has indicated that regulations on CDC expansion and revised auto-enrolment thresholds will follow in phases, though firm dates have not yet been published.

TPR has signalled that it expects to consult on updated codes of practice once the secondary legislation is laid before Parliament. Historically, the gap between Royal Assent and full implementation for pensions legislation has ranged from 12 to 24 months. Employers should therefore treat the period from mid-2026 as a preparation window rather than a compliance deadline.

Key milestones to monitor include:

  • Publication of draft regulations by the DWP, expected later in 2026.
  • TPR consultation on revised codes of practice and guidance.
  • Commencement orders specifying when individual provisions take legal effect.

Operators who wait for commencement orders before acting risk compressed timelines and higher advisory costs.

Cost and administrative burden for SMEs

The removal of the lower qualifying earnings band is the provision most likely to increase direct costs for smaller employers. Under the current framework, employer contributions of 3% apply only to earnings between £6,240 and £50,270 (2024/25 thresholds, according to HMRC). Contributions from the first pound earned will raise the base cost per employee.

For a worker earning £25,000, the current minimum employer contribution is approximately £563 per year. Removing the lower band increases that figure to roughly £750, a rise of around 33%, based on the same 3% minimum rate. For a business with 50 eligible employees at median earnings, the aggregate annual increase could amount to several thousand pounds.

The Office for Budget Responsibility has not yet published a standalone costing note for the Act. However, previous DWP impact assessments for the 2023 auto-enrolment extension estimated the total additional employer cost across the economy at approximately £2 billion per year once fully phased in, with smaller employers bearing a disproportionate share relative to payroll.

Administrative costs will also rise. Payroll systems will need reconfiguring to calculate contributions from the first pound. Employers using outsourced payroll providers should expect updated service agreements and potential fee increases. Those considering participation in a multi-employer CDC scheme will face due diligence and legal costs during setup.

Steps operators should take now

Practical preparation need not wait for secondary legislation. Several actions carry low cost and reduce future risk.

Audit current pension arrangements. Confirm scheme type, contribution rates, and the identity of trustees or governance bodies. Identify any gap between current practice and the new trustee fitness requirements.

Model the cost impact. Run payroll scenarios with the lower qualifying earnings band removed and the age threshold reduced to 18. Quantify the additional employer contribution cost at current headcount and at projected headcount for the next two years.

Review provider contracts. Check whether existing pension provider agreements accommodate CDC options or require amendment. Assess notice periods for switching providers if multi-employer CDC schemes become attractive.

Engage with TPR communications. Subscribe to TPR's employer updates. The regulator's enforcement posture has hardened in recent years; in 2024/25, TPR issued over 40,000 compliance notices and escalating penalty notices to employers, according to its annual report. Early engagement reduces the likelihood of enforcement action during transition periods.

Budget for advisory costs. Smaller employers without in-house pensions expertise should allocate budget for legal or actuarial advice once draft regulations are published. Costs for initial compliance reviews from specialist advisers typically range from £2,000 to £10,000, depending on scheme complexity.

The Act does not demand immediate action, but it does set a clear direction. Operators who begin preparation now will spread costs over a longer period and avoid the scramble that typically accompanies pensions commencement orders.