A bill to “strengthen” pension investment was announced in Wednesday’s King’s Speech, which unveils the new Government’s plans for the months ahead.
The speech, delivered by King Charles, sets out Labour’s plans after their General Election victory earlier this month.
The Government plans to deliver a Pensions Schemes Bill, which it says will support over 15 million people who save in private-sector pension schemes to get better outcomes.
It says the bill could help an average earner, who saves over their lifetime in a defined contribution (DC) scheme – which almost all people in the private sector save into – to have £11,000 extra in their pension pots.
It added it wants to encourage a pensions market that encourages consolidation – meaning people combine their pension pots into one.
Here’s what the Government says the Bill will do and what it means for your pension pot.
Consolidation of small pension pots
The Government says the Bill will prevent people from losing track of their pension pots through consolidating small pots.
This is similar to plans announced by the last Government for a ‘Pot for Life,’ whereby people’s pension pots follow them.
This will impact those who have DC schemes, where the money people have at retirement depends on the amount they contributed and the funds’ investment performance.
Currently, workers build new pots in every job they have, which means many start to build up multiple small pots, that can be confusing to keep track of.
In 2022, the value of lost pots was estimated to have reached £26.6bn.
The Government says small pots will be automatically brought together into one place to maximise income in retirement. It says this will benefit pension schemes themselves, by stopping them having to manage loss-making pots.
Kirsty Anderson, retirement specialist at Quilter, said: “If you have multiple small pots, you could be paying unnecessary administrative costs.
“Some providers may offset their losses by charging higher fees on larger pension pots, meaning you could be cross-subsidising the costs associated with managing smaller pots. Consolidating your small pots can save money and simplify your retirement planning.”
There may be some opposition to this though. When the previous Government announced its plans to introduce a ‘Pot for Life’ scheme, experts criticised elements of the plan.
The Society of Pension Professionals (SPP) said the plan was “likely to create a high risk that a saver could end up becoming stuck in the first pension scheme that they are enrolled in, mirroring the lack of switching in the banking sector, but with potentially worse outcomes”.
It also warned the plan could take years to deliver.
Test to ensure schemes deliver value for money
It says it will also introduce a test that trust based defined contribution schemes will need to meet to demonstrate they deliver value.
This should result in consolidation in the pensions market by leaving a smaller number of “well-performing, well governed” schemes.
The idea of having fewer providers has been criticised by industry insiders.
The SPP said: “Whilst having a small number of large providers may have some efficiency benefits, the costs of a bail out should a provider fail could be very significant. Loading those costs onto general taxpayers is likely to prove deeply unpopular.”
Anderson added: “The government is keen to ensure savers get value for money from their pension schemes. This includes clear disclosure of investment performance, costs, and service quality.
“While this focus is welcome, there remains the problem that too many people are not accruing enough into their pensions in the first place, so their decumulation plans already start from a difficult point. We need to view the retirement market holistically and ensure that more savers are engaging with their pensions earlier in life. Giving more people access to advice or guidance in differing formats throughout their financial lives will improve the market immensely.”
Require pension schemes to offer more retirement products
The Government says it will require pension schemes to offer retirement products rather than than just a savings pot when they stop work.
Most DC pensions function as a savings pot – there is a pot of money from which savers can pull money, though the responsibility for making this last is their own.
However, how people use this money varies. Some buy a pension product called an annuity with their pot. This provides a set annual income for life, regardless of how long they live for.
Other changes will also be made
The Bill will make some other adjustments to pensions. At the moment, in pension overpayment cases, pension schemes need to apply to courts to recover money, but the Government will ensure they no longer need to do this by reaffirming the Pensions Ombudsman as a “competent court.”
It will also extend the definition of ‘terminal illness’, allowing eligible members within the Pension Protection Fund (PPF) and the Financial Assistance Scheme – both of which cover members of defined benefit pension schemes that collapsed – to receive a lump sum payment at an earlier stage if they are terminally ill.
How much could these measures help?
Labour estimates that offering value for money and addressing small pots may lead to around 9 per cent higher pension pots at retirement for an average earner when saving over a career.
It added that there is a wide variation of performance across pension providers, where individuals are reliant on their employer to choose a pension scheme on their behalf yet face the impacts of poor investment performance.
By encouraging people to invest in better performing schemes, this could boost pension pots. It estimates that over a five-year period, a DC pot of £10,000 (with no further contributions) invested into the lowest performing scheme would be worth £10,400, whereas invested in the highest performing scheme it would be worth £15,100 – 46 per cent higher.
However, this is an estimate and would vary dramatically depending on a number of factors.
Tom Selby, director of public policy at AJ Bell, said: “The claim that the measures in the Bill could deliver bigger pensions needs to be taken with a pinch of salt, as ultimately this will depend on the performance of your investments. It is, of course, possible that this package of reforms will result in better investment returns for members – but this is never guaranteed.
“Investing in private equity, in particular, can come with significant costs and risks, so it is crucial trustees choosing to move in this direction are focused on delivering good retirement outcomes above all else.”
What was missed out?
One key thing missing from this Bill is any mention of scaling up automatic enrolment, Selby said.
“There is wide agreement that minimum contributions under auto-enrolment will need to rise, and a 2017 review recommended removing the lower earnings band and reducing the minimum qualifying age to 18 as a starting point.
“The legislation for these changes is already in place – but the big question is when will it be put into practice? By removing the lower earnings band, savers will benefit from an extra £500 a year into their pension, which would make a big difference over the course of a person’s lifetime.”
David Lane, Chief Executive of TPT Retirement Solutions, added: “We would urge the Government to implement much-needed pension reforms that don’t require new primary legislation. The most important of these is reducing the age for automatic enrolment to 18 and abolishing the lower earnings limit for contributions. These changes could significantly increase the retirement savings of thousands of workers.”