Pension savers could see their retirement pots deliver poorer returns under major changes unveiled by Rachel Reeves.
Experts are warning that the new system may end up doing more harm than good for millions of workers.
The Government has published the Pension Schemes Bill, outlining sweeping reforms to consolidate workplace pensions into “megafunds” of at least £25 billion. The legislation aims to drive investment into UK businesses through economies of scale.
However, Rachel Vahey, head of public policy at AJ Bell, cautioned that “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.”
The bill establishes a framework requiring schemes to demonstrate value for money and forces consolidation if they fall short of standards. Schemes failing to reach the £25 billion threshold by 2030 must merge with larger funds.
Vahey expressed concern that the drive for larger funds could harm market dynamics. “Bigger is not necessarily better, and obliterating smaller schemes could reduce competition in the market and may stifle incentives to deliver innovation,” she said.
The reforms aim to channel pension investments into UK businesses to support economic growth.
The Government recently secured the Mansion House Accord with 17 workplace pensions, committing them to allocate up to 10% of default strategy assets to private markets by 2030.
The reforms aim to channel pension investments into UK businesses to support economic growth
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Whilst the Government won’t initially force schemes to invest in UK assets, it has reserved the right to mandate minimum UK investment levels in future.
This shift towards private equity investments carries inherent risks that could impact members’ retirement savings if these investments underperform.
The consolidation process will proceed without requiring individual members’ consent. Schemes that don’t meet the £25 billion target must demonstrate they have at least £10 billion in assets under management by 2030 and provide The Pensions Regulator with a credible plan to reach £25 billion by 2035.
The bill also introduces automatic consolidation of small pension pots worth £1,000 or less from automatic enrolment schemes
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If schemes fail to meet these requirements, they will be forced to merge with larger funds. The legislation includes measures allowing member consolidation without obtaining their individual permission.
This forced consolidation could eliminate smaller schemes that currently offer competitive advantages.
Vahey warned that members might lose access to preferred charging structures, investment options, or communications they value when their pensions are moved to megafunds without their consent.
The bill also introduces automatic consolidation of small pension pots worth £1,000 or less from automatic enrolment schemes.
These 13 million stranded pots will be moved to “automatic consolidator” schemes without requiring member permission once contributions have ceased for 12 months.
Vahey warned that whilst this might help some members, “others may find their pension has been moved to another scheme that doesn’t offer the charging structure, investment options, or communications they value.”
She noted that members can opt out and consolidate their pensions into a plan they choose themselves.
The value for money framework will require schemes to compare themselves against peers on charges, investment performance and customer service. Schemes falling short must improve or face forced consolidation.
Trustees will be required to offer retirement income solutions to members approaching retirement, presenting curated options and placing disengaged members into default solutions
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Trustees will be required to offer retirement income solutions to members approaching retirement, presenting curated options and placing disengaged members into default solutions.
Multiple default solutions may be operated, requiring trustees to match members to appropriate ones based on circumstances.
Vahey criticised this approach: “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.”
Members should be informed about default solutions early in their pension journey and can opt out before or after accessing their pension pot. However, the one-size-fits-all nature of these solutions may not suit individual members’ varying retirement needs.
