Government proposals over changes to how pensions are run were released on Thursday, with headlines around £6,000 boosts to workers and £25bn megafunds painting a positive picture for the future.
Chancellor Rachel Reeves said the “reforms mean better returns for workers” and pointed out extra investment for businesses in the UK could push economic growth. But it’s all rather abstract for workers - especially on the back of a recent study looking at whether pension contributions were subject to tax - who might simply want to know: what’s happening to my pension now?
What’s happening and what may change?
Currently, many pension providers are in operation across the UK, large and small. The plan is to combine many of them into “megafunds”, with your employer-defined contribution (DC) pensions - those are workplace pensions you automatically pay into from your salary, before tax - being pooled with others to create giant funds worth at least £25bn. Local government pension schemes will be consolidated too, from 86 authorities down to six groups.
The plan is for this to happen over the next five years, with any funds which don’t achieve that figure being given extra time if they can provide the pathway for how they’ll get there.
Industry body the Society of Pension Professionals has given its approval to the scheme, as have many of the UK’s largest existing pensions companies, with deputy prime minister Angela Rayner saying the money in these pension pools will drive “growth and opportunities in communities across the country for years to come”.
“The Pension Schemes Bill hopes to achieve this revolution through a combination of consolidation of workplace schemes in the private sector and across local authority schemes into ‘megafunds’, with voluntary agreements by those schemes to boost their allocation to UK-based investments, with a significant emphasis on private equity and ‘productive’ assets,” pensions expert Alice Guy told The Independent.
“The UK pension system is incredibly fragmented with thousands of small schemes, which adds complexity and costs for pension providers.
“Having fewer, bigger schemes should make it easier for regulators to keep an eye on performance and underlying fees,” Ms Guy added. “Practically speaking, most of this will happen behind the scenes - your money is protected and ringfenced. Most pension schemes are broadly similar, so there won't be much obvious impact on pension savers.”
Pooling pension money into megafunds is likely to mean that your pension provider may change or merge with others, but this could yet be years down the line.
£6,000 each? Sort of
So, this six grand benefit.
The government report cited the example of an average pension pot, with its value under current conditions and then adding in changes through lowered fees and costs and an expected two per cent uplift from the benefits of new investment options.
As a result of those changes, they estimate a £5,900 positive change to the average pension pot.
Ms Guy explained: “The estimated £5,900 saving is based on providers passing on cost savings to pension savers. An average 22-year-old earner is expected to save £2,500 on pension fees over their working life and enjoy a £3,300 investment boost due to better investment performance. Ministers hope that bigger funds will have more resources to invest in a wider range of assets, including private equity.”
So, you’re not exactly going to see an extra chunk of cash in your bank account, or indeed appear in your pension fund. But that’s the expected benefit per person after the reforms.
This is a many-year approach, of course, and actual pension value will depend not just on how much you earn and the fees you pay, but also on the market value of those investments at the time of your retirement.
Reason for caution
Tom Selby, director of public policy at AJ Bell, points out a few notes to be aware of, including no guarantee of any long-term benefit at all.
Most of all, for some there will be the danger of chasing government policy plans over investor benefit.
“Many of the claims about the benefits of these reforms to pension savers and retirees need to be taken with a fistful of salt,” Mr Selby said. “While there may be some efficiency benefits to consolidation, these are difficult to quantify with certainty and reducing competition in the market may stifle incentives to deliver innovation.
“In addition, private equity investing is notoriously high cost and high risk, meaning it is entirely possible people will end up worse off if those investments fail to perform over the long term.
“There is a clear danger that conflating government policy goals – namely driving higher levels of investment in the UK and ultimately economic growth – with those of savers and retirees means the latter will be risked in pursuit of the former.
“It is vital the needs of pension scheme members remain the priority, rather than the needs of a government focused primarily on its growth agenda and ultimately to bolster its chances of re-election.”
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