The Government has confirmed plans to double the number of UK pension ‘megafunds’ by 2030, with millions of workers set to retire with bigger pension pots.
The Pensions Investment Review published on Thursday said reforms set to be introduced through the Pension Schemes Bill will mean all multi-employer defined contribution pension schemes and Local Government Pension Scheme pools operate at megafund level, managing at least £25 billion in assets, by 2030.
Chancellor Rachel Reeves said the reforms, designed to follow the example of Australia and Canada, will allow pension funds to invest in big infrastructure projects and private businesses, which the Government believes will boost the economy while potentially driving higher returns for savers.
A recent voluntary commitment from 17 of the UK’s largest pension funds to invest 5% of assets in the UK and new local investment targets for LGPS authorities, has already secured £50 billion.
The Government said this tackles the gradual decline in domestic investment from UK pension funds, where around 20% of DC assets are currently invested compared to over 50% in 2012.
At the same time, Reeves said the reforms will drive higher returns for savers, in part by cutting waste in the system. By 2030, these schemes could be saving £1 billion a year through economies of scale and improved investment strategies. As a result, an average earner who saves over their career could see a £6,000 boost to their DC pension pot at retirement.
Chancellor of the Exchequer Rachel Reeves said: “We’re making pensions work for Britain. These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses.”
Minister for Pensions Torsten Bell added: “Our economic strategy is about delivering real change, not tinkering around the edges. When it comes to pensions, size matters, so our plans will double the number of £25 billion plus megafunds.These reforms will mean bigger, better pension schemes, delivering a better retirement for millions and high investment in Britain.”
However, industry commentators warned of the effect of ‘mandation’ on the pensions industry.
Matt Tickle, chief investment officer at Barnett Waddingham, said: “The main concern for schemes following the Government’s wide ranging pension announcements is the looming threat of ‘mandation’.
“While the Chancellor’s ‘backstop’ power, which could compel funds to back British assets, appears to have deterred that threat for now, any move towards mandated investment is a blunt tool, leaving members and society as a whole at risk of poorer outcomes.
“That said, the fact that there is time gives some of the Government’s better policies, around planning reform, value for money and retirement pathways more space to succeed. If they do, they could generate opportunities that pension schemes will willingly invest in. Efforts to improve the flow of investable opportunities are certainly positive, however there is still an urgent need to focus on reforms rather than enforcing mandates.”
David Brooks, head of policy at Broadstone, shared a similar sentiment.
“The Pensions Investment Review is to set out an explicit direction of travel towards mandating pension scheme investment into UK assets and infrastructure. This is a risky move, not least because the Treasury itself has had to admit that any gains for savers are unclear and likely to be limited. Savers will naturally be worried that their pension pots will not necessarily be invested with the best returns in mind but rather required to achieve specific allocations to Treasury-dictated geographies and sectors.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “While scale is important in delivering better outcomes for savers, it must not come at the cost of reducing competition, member choice and much needed innovation. This has the ability to really drive up member engagement with their pensions, improve decision making and boost outcomes. It’s important to pick through the detail of the report and later regulation to see how this is supported.”
Morrissey said detail needs to be fleshed out on how the transition pathway for providers looking to reach scale by 2035 will work and space made for smaller, innovative providers.
She added: “With the changes planned from the advice guidance boundary review and pensions dashboards coming on stream, there’s a big opportunity to transform how we all engage with our pensions.
“Added to this the work on consolidating small pensions has the potential to be developed into a Lifetime Pension system whereby members can choose the provider that they want to receive their contributions. It’s a move that could reinvigorate how people engage with their retirement saving. The push for scale shouldn’t stifle the innovation that can flow from these regulatory changes.”
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