The bill sets out plans to cut the number of pension schemes and create ‘megafunds’ worth at least £25bn.
The bill covers the creation of megafunds, the need for trustees to demonstrate value for money, solutions for small pension pots and the consolidation of Local Government Pension Schemes (LGPSs).
It also contains rules to ensure more pension money is invested into UK infrastructure.
Is bigger and British better?
Rachel Vahey, head of public policy at DIY investment group AJ Bell, said the Government is “hoping for pension reform on a grand scale”.
“The ultimate aim is to channel pension investment into UK plc to help balance the country’s accounts.
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“But bigger is not necessarily better, and obliterating smaller schemes could reduce competition in the market and may stifle incentives to deliver innovation. Even worse, megafund members may find that the investment of their hard-earned pension pots in riskier private equity could mean they end up worse off in retirement if those investments fail to perform over the longer term,” she said.
Damon Hopkins, head of DC workplace savings at financial services consultancy Broadstone, said the industry had “had its arm twisted” to allocate more money in the UK.
The bill inserts a ‘backstop’ so that if funds do not allocate enough money to UK investments, they will be directed to invest in a specific investment pool.
“There continues to be a potential conflict, particularly if mandated, between a pension scheme’s fiduciary responsibility to maximise savers’ retirement outcomes (i.e., investing in assets with optimal risk/return profiles) and the advantages to the UK economy.
“While billions of pounds of investment into the UK economy will have obvious advantages, UK pension savers are inherently exposed to risks in the UK economy in their [day-to-day] lives, so increasing this risk may not be optimal, nor is it guaranteed that the returns yielded will be better than those on offer globally,” he said.
Rachel Reeves, the Chancellor of the Exchequer, said the bill will improve outcomes for savers and the economy, saying: “The bill is a game-changer, delivering bigger pension pots for savers and driving £50bn of investment directly into the UK economy – putting more money into people’s pockets through the Plan for Change,” she said.
Torsten Bell, minister for pensions, said: “We are ramping up the pace of pensions reform. Workers deserve to get better bang for each buck saved, and these sweeping reforms will make sure they do.
“Pension saving is a long game, but getting this right is urgent so that millions can look forward to a higher income in retirement.”
What the bill contains
The bill’s contents include the following:
- Creation of megafunds
The bill will put in place the legislative framework to enable large funds to be created.
- Value-for-money requirement
Schemes will be required to prove they are value for money to protect savers from getting stuck in underperforming schemes. Schemes will have to mark themselves against their peers on three sets of metrics – charges, investment performance and customer service. The results will be published, and if schemes fall short, then they will have to act to improve their offering or even consolidate into a larger scheme.
- Default retirement choices
Pension schemes must offer default routes to retirement income. Trustees must present a curated selection of options, and if members are disengaged, place them in a default solution.
- Consolidation of small pots
Pension pots worth £1,000 or less will be brought into one pension scheme that is certified as delivering good value to savers
- The consolidation of the LGPSs
Assets for the scheme will be held in six pools that can invest in local areas infrastructure, housing and clean energy.
The next step is for the bill to receive royal assent, after which the Department for Work and Pensions (DWP) will set out new rules in more detail.
