The Government has hailed the Pension Schemes Bill a “game-changer” that will transform the £2 trillion pensions landscape to boost saver returns and drive investment into the economy.
On Thursday (5th June), the Government published its long-awaited Pension Schemes Bill, setting out a wide-ranging package of measures, which it says will help millions of people planning their retirement find it easier to manage and get more from their pension pots, while encouraging investment in UK-based assets and projects.
Central to the new reforms is the creation of multi-employer DC scheme ‘megafunds’ of at least £25 billion by 2030, to drive economies of scale and stimulate UK investment.
The Government will also allow trustees of well-funded defined benefit pension schemes to release money back to employers and their scheme members, unlocking some of the £160 billion surplus funds to be reinvested across the UK economy.
It will also legislate for defined benefit pension scheme superfunds to encourage growth of the superfund market.
Furthermore, the Bill will remove the restrictions that prevent the Board of the Pension Protection Fund from reducing the annual pension protection levy it collects when it is not required.
Chancellor of the Exchequer Rachel Reeves said: “The Bill is a game changer, delivering bigger pension pots for savers and driving £50 billion of investment directly into the UK economy, putting more money into people’s pockets through the Plan for Change.”
However, Rachel Vahey, head of public policy at AJ Bell, warned that “bigger is not necessarily better.”
She said of the Government’s plans for pension ‘megafunds’: “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.”
Better outcomes for savers
The Bill has also set out major changes aimed at achieving better outcomes for savers. These include the introduction of a Value for Money framework, which will shift the focus from cost towards value and protect savers from becoming stuck in underperforming arrangements for extended periods.
Vahey commented: “Having a common framework will hopefully encourage, or even shame, schemes into improving their offering to customers, whether that means better investment performance, lower charges, slicker service or a combination of all of those things.”
However, Pete Glancy, head of pensions policy at Scottish Widows, said the new framework is designed for pension professionals rather than savers.
“At present, there is no way to compare the different products in the market on a like-for-like basis. This new framework will arm employers and those who advise them to do just this. The framework, however, is complex and has been designed for use by pension professionals. It has not been designed with pension savers in mind. It should be a priority to develop a similar framework for pension savers so that any consolidation decisions that they make are properly informed.”
The reforms will also see small pension pots worth £1,000 or less automatically consolidated into a small number of larger schemes, in a move that was particularly welcomed by pension experts.
Glancy said: “This initiative will be hugely beneficial for pension savers across the board. We expect this initiative to complement Pension Dashboards. It’s likely that as people become aware of their multiple pension pots through a pension dashboard that they will increasingly choose to consolidate pots, large and small, into whichever product or scheme is offering the best performance.”
Lisa Picardo, chief business officer UK at PensionBee, said: “With millions of lost pension pots and millions of pots under £1,000 no longer being contributed into, making consolidation the default for these micro pots will be a highly beneficial first step. This reform has been a long time coming and should mark the start of a wider shift towards a more modern, joined-up pensions system.”
For those approaching retirement, the Bill will require schemes to offer clear default options for turning savings into a retirement income. While savers will still have the options available to them through pension freedoms, the Government said being enrolled into default solutions will provide an “extra offer of support.”
Vahey said savers will need to remain “alert” as to whether the solution is right for them.
She explained: “Devising one solution to fit thousands of members’ needs is always going to be impossible and pension scheme members will still need to be alert to check whether the solution pathway they have been placed on is the right one for them, both now and as their circumstances change.
“If not, then they should be given the ability to opt out at any time and decide for themselves how to spend their hard-earned retirement pot.”
Minister for Pensions Torsten Bell commented: “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.”
Andy Briggs, CEO of Phoenix Group, said: “People across the country will feel the impact of these changes with plans to consolidate small pots, ensure the dashboard delivers and provide default retirement income options at the point of retirement.
“Individually these initiatives would be significant but in combination they have the potential to make a significant difference to people’s retirement across the UK and we look forward to working through the detail with Government and other stakeholders.”
While the Bill was largely welcomed by the pensions industry, many expressed a desire for further detail around implementation.
Steven Cameron, pensions director at Aegon, said: “There’s a huge amount to be welcomed in this blockbuster of a Pension Schemes Bill. After months, and in some cases years of debate and consultation, the Bill paves the way for a brave new world of workplace pensions.
“The Government is rightly highlighting the benefits scheme consolidation and a new approach to pension scheme investments can bring to the UK economy. But the real litmus test must be to make sure the changes deliver tangible benefits for the millions of individuals saving for retirement.
“There’s a huge amount of change here, with many inter-connections, which will require several years of careful planning and implementation. The Government has promised to set out its intended timeline, which will be key in helping both providers and scheme members plan ahead.”
David Brooks, head of policy at Broadstone, said: “We hope to now see a period of delivery, consistency and certainty across the board in the pension’s world, no matter what colour of political party inhabits Number 10. Trust and security is critical to achieving positive outcomes and constant tinkering with the system will inevitably confuse pension savers.
“Bringing today’s reforms together and executing on the promise they have will be a huge challenge and the industry will be looking for a clear plan and timeline from the Government to achieve this.”
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