UK DC – Key themes & opportunities for 2025 

The UK Government, the Department for Work and Pensions (DWP), the Pensions Regulator (TPR), and the Financial Conduct Authority (FCA) are proposing a joint Value for Money (VfM) framework for DC workplace pension plans. The shared goal is to create better outcomes for pension savers via a healthy and competitive market.

The new framework is expected to be launched as part of the Government’s planned Pension Schemes Bill. It will come with a long list of new requirements.  It is expected that DC workplace pension plans will need to publish the VfM results each year. TPR and the FCA will have new powers to enforce action where poor value is identified.

• Benchmark your DC scheme with our free DC MOT pension audit. Our comprehensive DC pension plan review lets you benchmark yourself against other UK employers and against Mercer’s view of best practice for defined contribution schemes. Our 2024 DC MOT report highlighted the ways DC schemes can evolve their strategies to stay competitive, cost-effective and focused on members’ needs. 
• DC scheme sponsors should take time to review how value in the Company’s pension arrangement interacts with wider benefits offered to employees.
• If you have been conducting VfM assessments under the existing framework, consider any actions you may need to take to enhance value.

Support for members at retirement continues to be an issue for Trustees and Corporates. We fully support the Government’s plans to legislate in this area. Figures from the FCA² highlighted how approximately 57% of all DC pension pots are cashed in entirely on first access, when leaving some funds in the pension might have led to better returns and a lower tax bill.

Retirement packs are issued and members are typically signposted to Money Helper or to consider taking financial advice before they make one of their biggest financial decisions  that will impact the rest of their life.

The flagged intent for the DWP to work with TPR to provide interim guidance to help schemes develop their decumulation services and encourage innovation will be a welcome step ahead of any formal legislation.  

2025 should see DC schemes actively exploring what forms of decumulation products and services are needed to best serve members. In many cases, this will require a significant step-change in thinking for fiduciaries of DC arrangements in determining  the optimal approach for what will amount to a ‘full service offering’.

• Start off by arranging a decumulation training session for the Trustee or pension governance committee to build a better understanding of the relevant issues to be navigated.
• In advance of any legislation, consider how the guidance and advice provided to members can be enhanced. Education is key in helping members plan effectively and giving them access to simple and engaging planning tools to make smart, tax efficient decisions can go a long way.
• Explore how Mercer Retirement Services offers a comprehensive range of options to help members navigate their retirement journey more effectively.

We recognize that many Trustees and sponsors may feel overwhelmed by the pace of change in the UK DC market, both from a legislative perspective but also the quickly evolving nature of what a best practice DC offering looks like.

We see this evolution only picking up pace in 2025 and beyond, particularly with the government’s drive to leverage the benefits of scale and focus on value from several different metrics. Coupling this with the potential that technological advancements could offer DC plans in areas such as artificial intelligence (AI) demonstrates the importance of continually seeking out opportunities to innovate.

Gone are the days when pension communication was a passive affair, with members left to their own devices to seek out information, or not. As both technological advances and market dynamics push providers towards more active, personalised approaches to engagement, it is clear that those who do not adapt will be left behind. See our 2024 piece Improving engagement today to improve outcomes tomorrow for our thoughts on what the UK DC industry can learn from the Australian market.

The challenge to innovate is also a continual feature of setting the default investment strategy (and wider range of options) for UK DC Schemes. We’re seeing a confluence of factors driving this trend with government and member expectations on the rise. The appeal of growing DC asset pools is spurring innovation in the investment management industry to launch funds for UK DC schemes that were perhaps once only the preserve of Defined Benefit (DB) arrangements. In 2025 and beyond, we expect to see an increasing gap between those DC schemes with the scale and governance resources to embrace some of this more innovative investment thinking and those that risk stagnating. 

• Get a better understanding of the path your members are on with our Retirement Readiness Index. This will enable more targeted engagement initiatives to different cohorts of members but also help inform your investment strategy.
• We naturally think of DC members when it comes to engagement but don’t forget about your fiduciary responsibility for any Additional Voluntary Contribution (AVC) arrangements.
• Look at how your provider’s AI tools can help enhance the member experience throughout both the accumulation and decumulation phases.
• The long-term return premium from investing in private (versus public) markets is well evidenced. With the number and variety of private market funds now accessible to UK DC schemes on the rise, 2025 should see this move up the agenda for meaningful consideration.
• Using our guiding principles for UK DC default design, consider whether your default strategy remains appropriate for your members.
• Consider ways to unlocking the path to sustainable investment with Mercer’s Responsible Investment Total Evaluation (RITE) survey
• The Pension Regulator’s General Code expects trustees to consider climate change as part of operating an effective system of governance.  Mercer’s Analytics for Climate Transition (ACT) provides an insight into climate change risks within investment portfolios, supporting trustees to develop climate transition plans and manage overall climate change governance.  Read our Transition Today paper to explore how investors can address the causes and impacts of climate change.