Britain’s biggest pension reform in a decade is now law. The Pension Schemes Act 2026 received Royal Assent in April, after a long passage through the Lords and four rounds of parliamentary ping pong, and the coverage has settled on one word: megafund. The Act pushes the country’s defined contribution (DC) savings into a smaller number of vast default funds, on the theory that scale buys lower costs and access to private markets. It is a genuine structural change. It is also not the part of the Act most likely to decide whether a given saver ends up in a good scheme or a bad one.
That question turns on a quieter mechanism, the Value for Money (VFM) framework, and the framework is still being built. Its detailed shape was put out for consultation on 13 July 2026 by the Department for Work and Pensions and the Financial Conduct Authority, and that consultation closed on 1 September. Read alongside the megafund rules, the VFM framework is where the Act grows teeth: the power to rate a workplace pension on value and, if it fails, to close it to new money and move savers out.
Three levers, one Act
The Act rewrites DC pensions around three levers. The first is scale. To keep receiving automatic-enrolment contributions, a DC multi-employer scheme must hold at least £25bn in its main-scale default arrangement by 2030, or £10bn with an approved transition plan to reach £25bn by 2035. The second is value: the VFM framework, which forces schemes to publish standardised metrics on cost, net investment performance and service quality, and to carry a public rating. The third sits on the defined benefit (DB) side, where sponsors of well-funded schemes will find it easier to extract surplus, with the release threshold lowered from the cost of a full insurance buyout to the softer low-dependency funding level.
The megafund lever is the loudest, and the most contested. The Pensions Policy Institute has warned that scale alone does not guarantee better returns, and that herding large funds into similar assets could dampen outcomes rather than lift them. But scale is a blunt instrument. The VFM framework is the precise one, because it is the mechanism that actually judges a fund and can compel it to stop.
What a red rating does
Under the framework, providers and trustees must assess each default arrangement and publish a rating. The design has moved on from a simple traffic light. The latest consultation sets out a four-point scale, from dark green and light green through amber to red. Red is reserved for arrangements whose poor value cannot realistically be improved.
The consequences are the point. A red rating, and in some cases amber, can trigger mandatory action: an improvement plan, closure to new business, and ultimately the transfer of members into a better-value scheme. That last step relies on the new contractual-override powers the Act provides, which let a provider move savers out of a failing default without collecting each individual’s consent. This is the enforcement teeth the megafund narrative obscures. It is also a significant shift in the relationship between a saver and their pension, and it is being calibrated in secondary legislation rather than settled in the Act itself.
The teeth are real, but deferred
Here the sceptical reading begins. The power to force underperformers out is real, but it does not bite for years. On the current timetable, master trusts, large single-employer trusts and the biggest contract-based schemes complete their first full assessments in 2028, with all in-scope schemes following from 2029. The consultation is explicit that no formal consequences apply in 2028: closure measures take effect only from the second assessment cycle. A default rated red in its first assessment therefore keeps taking money for a further cycle before the framework can compel it to shut.
Nor is the test settled. The FCA expects to publish its final rules in the first quarter of 2027, with the DWP’s response and regulations by January 2027. The metric definitions, the thresholds that separate amber from red, and the weighting between cost, performance and service are precisely what the July consultation reopened. So the honest answer to who gets forced to wind up, and on whose test, is that the test is not yet written, and the first forced exits are years away.
Whose test, and what it rewards
The design choices carry their own risk. A framework that leans heavily on past net investment performance can punish a scheme for a weak recent run and reward one that took on more risk in a rising market, which is not the same as rewarding value. It can also encourage the very herding the PPI cautioned against, as schemes converge on whatever asset mix scores well. The FCA’s addition of two green tiers, dark and light, is partly an attempt to stop green being read as a simple pass and to preserve some gradation of quality. Whether four boxes can carry that much judgement is an open question.
The DB surplus lever, meanwhile, is smaller than it looks. The government’s own assessment expects only about £8.4bn of surplus to be released over ten years, with half of that going to members through benefit enhancements, leaving roughly £4.2bn for sponsors. It is a useful loosening for well-funded schemes, not a wall of cash.
The Act, then, has set the direction. But the instrument that will decide which savers are protected, and which providers are pushed out, is still on the drawing board, and will not draw blood until the end of the decade.
Primary sources: Pension Schemes Act 2026 (Royal Assent April 2026, UK Parliament, Bill 3982); DWP and FCA joint consultation CP26/25, “The Value for Money Framework” (13 July 2026, closed 1 September 2026); FCA CP26/1, “The Value for Money Framework: Response to consultation, further consultation and discussion paper” (8 January 2026), introducing the four-tier rating; Pensions Policy Institute analysis on megafund scale and returns (2026).
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