A radical shake-up of the pension system is set to consolidate millions of workers’ savings into massive “megafunds”, with smaller pots valued at £1,000 or less being automatically consolidated. Ministers claim that the Pension Schemes Bill, announced today, will result in “bigger pots” and “better value” for those saving for retirement. However, critics argue that the reforms may not necessarily lead to increased pension payouts.
The key changes, led by Chancellor Rachel Reeves and Work & Pensions Secretary Liz Kendall, include:.
* Consolidating small pension pots worth under £1,000 into larger schemes.
* Establishing multi-employer megafunds with a minimum value of £25 billion.
* Requiring schemes to demonstrate value for money to continue operating.
* Providing default drawdown options for retirees.
* Releasing £160 billion in surpluses from defined benefit pensions.
Ms Reeves hailed the reforms as a “game changer”, predicting they would generate £50 billion in investment for the UK economy and increase savers’ incomes.
“The Bill will revolutionise the £2 trillion pensions landscape,” she said, “ensuring savers get good returns for each pound they save.”
However, some financial experts have expressed caution and scepticism about the Government’s ambitious claims. Their concerns follow hints from the Government that it may set legal targets for the amount pension funds must invest in the UK, shifting money from global stocks to domestic projects – a move that critics fear could result in lower returns.
Research conducted by wealth firm Quilter for The i paper suggests that a worker on a £40,000 salary could potentially lose £18,000 from their pension pot under the new system, assuming some funds are invested in UK private investments such as infrastructure and property.
Jon Greer, head of retirement policy at Quilter, commented: “While the UK economy will undoubtedly benefit from greater investment and capital flows, the direct gains to individual pension pots are likely to be modest.”
Despite reservations, the Government maintains that the overhaul will reduce costs, simplify pensions, and provide “more bang for each buck saved”, as stated by Pensions Minister Torsten Bell.
The Work and Pensions Secretary, Liz Kendall, heralded the changes saying: “Hardworking people across the UK deserve their pensions to work as hard for them as they have worked to save, and our reforms will deliver a huge boost to future generations of pensioners.
“The Bill is about securing better value for savers’ pensions and driving long-term investment in British businesses to boost economic growth in our country. As part of our Plan for Change we’re helping people find work, stay in work, and ensuring that work pays them back to give them the secure income in retirement they deserve.”
Industry experts generally supported the direction of the reforms, but expressed some caution regarding the pace and complexity of the changes. Andy Briggs of Phoenix Group stated: “Individually these initiatives would be significant, but in combination they have the potential to make a significant difference.”
Patrick Heath-Lay of People’s Partnership described it as a “pivotal moment”, while Nest CEO Ian Cornelius said the Bill would “drive great outcomes for members”.
Rocio Concha of Which? commented: “Pensions have become far too complex and fragmented… we are delighted that this Bill is seeking to consolidate small pots.”
