20 million workers are set to benefit from a new Pension Schemes Bill which promises to "tackle schemes delivering poor returns for savers, combine smaller pension pots, and create bigger and better pension funds".
The government Bill is designed to make pensions simpler to understand, easier to manage, and drive better value over the long term.
The Bill introduces a series of measures, including:
- Requiring DC schemes to prove they are value for money, to protect savers from getting stuck in underperforming schemes.
- Simplifying retirement choices, with all pension schemes offering default routes to an income in retirement.
- Bringing together small pension pots worth £1,000 or less into one pension scheme that is certified as delivering good value to savers.
- New rules creating multi-employer DC scheme “megafunds” of at least £25 billion, so that bigger and better pension schemes can drive down costs and invest in a wider range of assets.
- Consolidating and professionalising the Local Government Pension Scheme (LGPS), with assets held in six pools that can invest in local areas infrastructure, housing and clean energy.
- Increased flexibility for Defined Benefit (DB) pension schemes to safely release surplus worth collectively £160 billion, to support employers’ investment plans and to benefit scheme members.
Industry reacts
Yvonne Braun, director of policy for long term savings at the ABI, said: "This wide-ranging Bill is set to usher in the most large-scale pension reforms since auto-enrolment. The details will be crucial and we will scrutinise the Bill to ensure it puts the interests of savers first.
We also urgently need to tackle the level of pension contributions which are too low to create an adequate retirement income for many. We urge government to set out the details of its adequacy review as soon as possible."
Steven Cameron, pensions director at Aegon, commented: “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.
“Savers will have the assurance that workplace pensions are consistently offering value for money, with a strong focus on good investment returns. They’ll be able to access pension dashboards to see all their pensions in one place, while having small pots (under £1000) they’ve left behind when changing jobs brought together.
“The ambition for all schemes to offer their members clear default retirement options will be helpful for some, but mustn’t discourage individuals from engaging fully to make the best decisions for their own personal 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.”
Gail Izat, managing director for workplace and retail intermediary at Standard Life, said: “Hot on the heels of the Pension Investment Review we have the Pension Schemes Bill. The Bill builds on the government’s push for greater scale in DC savings and emphasis on value for money.
“Enabling providers to consolidate savers into their primary default funds will be an important catalyst in delivering the government’s ambitions of DC mega-funds. Many providers already invest at scale but this approach will consolidate the number of default funds and help deliver greater efficiencies on behalf of savers.
“In a number of important ways, the Bill looks to address some of the unresolved issues that emerged following the landmark auto-enrolment and pension freedom reforms. The proliferation of small pots has been a consequence of both auto-enrolment and the modern job market and consolidators will step in to bring together pots below £1,000. The detail and commercial model of this system will require considerable thought. It was good to see a reference to delivering on pension dashboards too as they will play a vital role building people’s connection with their pensions.
“Pension freedoms have given people the ability to take their money as they see fit and research shows people value this ability to choose. However, it leaves people having to make significant decisions about how long they might live, where to invest and how much income they can afford to take. The introduction of Guided Retirement Options has the potential to be one of the most significant things the industry could do to ensure people are supported to make the most of their money. The initial focus here is on trust based schemes where there is a real mix of support at present, but the customer need applies across the board. It was interesting to see government reference longevity protection in their announcement as we believe having a degree of income certainty is vital when helping to manage essential expenses in retirement.
“The value for money framework will enable people to compare schemes on a number of metrics including service quality and investment performance - not just costs and charges. There is still some detail to work through around how service targets are quantified and how the framework will apply to multi-employer schemes but ultimately a policy that helps people transfer from poor performing schemes into better ones should be welcomed.
“In combination these policies place the focus for the industry firmly on scale, value for money and better engagement for people with their savings. They draw on lessons we’ve seen from other global pension systems where these levers have been used to deliver better outcomes for savers.”
Sankar Mahalingham, managing director of LawDeb Pensions, added: “Any reforms that simplify pensions governance and deliver real benefits to savers should be applauded - however, further scrutiny of the Pension Schemes Bill is needed to check it fits those criteria.
“Schemes need to ensure the interests of their members are the centre point of any decisions, which is why it’s positive to see that the Government will challenge schemes delivering poor returns. Overhauling small pots, reducing management requirements and making performance crystal clear should also encourage more savers to take notice of their pensions; removing barriers that so often contribute to inertia when it comes to governance.
“However, while the creation of ‘megafunds’ may be an effective way to lower costs and streamline asset options, the Government must ensure that, at its core, this is a driver for increased performance for savers - and not, as may be thought by some, just another tool to serve their agenda for economic growth."
