- The government today published the Pension Schemes Bill, setting out a raft of legislative changes it believes will bring about pension reform
- The bill sets out the framework to consolidate pension schemes to create ‘megafunds’ of at least £25 billion to drive economies of scale and more pension scheme investment in UK plc, as set out under the government’s recent Pension Investment Review
- Trustees will be required to demonstrate the value for money (VFM) their schemes are offering members and will be forced to act if their scheme falls short of expected standards
- 13 million small, stranded pension pots worth £1,000 or less built up under automatic enrolment schemes are set to be automatically consolidated
- Schemes are expected to set default solutions for members accessing pension money – if workplace pension savers want to do something different, they will have to opt out of the default
- Once the bill has received Royal Assent, it’s expected DWP will publish regulations setting out the new rules for pension schemes in more detail
Rachel Vahey, head of public policy at AJ Bell, comments:
“With the publication of the Pension Schemes Bill, the government is hoping for pension reform on a grand scale, drastically cutting the number of pension schemes by forcing more to consolidate into larger ‘megafunds’ of at least £25 billion. The ultimate aim is to channel pension investment into UK plc to help balance the country’s accounts.
“But bigger is not necessarily better, and obliterating smaller schemes could reduce competition in the market and may stifle incentives to deliver innovation. Even worse, 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.
“Small stranded pension pots built up under automatic enrolment will in future be automatically consolidated without the member having to give permission. Whilst this may 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. But this doesn’t have to be a foregone conclusion. Pension savers can opt out if they want to and consolidate their pensions in a plan where they choose themselves, offering them the features they want.
“The aim of the value for money framework is to deliver an easy way for schemes to compare themselves against their peers. Having a common framework will hopefully encourage, or even shame, schemes into improving their offering to customers – whether that means better investment performance, lower charges, slicker service or a combination of all of those things. But if schemes do fall short of the expected standards, then they will be expected to improve or could even be forced to consolidate into larger schemes, and that consolidation could go ahead without getting members’ permission. This is another way the government sees driving consolidation of the pension market to create only a few key workplace schemes.
“There is no doubt pension scheme members need help deciding what to do with their pension pot, but whilst the FCA has gone the way of introducing targeted support to help them make these complicated decisions, the DWP has chosen to put occupational scheme members into a default solution giving them a set outcome.
“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. If not, then they should be given the ability to opt out at any time and decide for themselves how to spend their hard-earned retirement pot.”
What’s included in the Pension Schemes Bill?
Creation of mega funds
Part of the government’s agenda is to harness workplace pension scheme assets to invest in private assets and increase capital flows to UK businesses, to ultimately boost UK growth. It recently secured the Mansion House Accord with 17 workplace pensions to voluntarily allocate up to 10% of their default strategy assets to private markets by 2030.
The next step is to consolidate the workplace pension market through the creation of megafunds. The bill will put in place the legislative framework to enable the measures agreed in the government’s recent Pension Investment Review.
There will be a minimum size of £25 billion for a default investment fund for multi-employer workplace schemes by 2030. To help smaller schemes reach this target, they can demonstrate they have at least £10 billion assets under management (AUM) by 2030, and provide TPR with a credible plan to have £25 billion AUM by 2035.
If schemes don’t meet this target they will be forced to consolidate with larger schemes. Measures will be introduced to allow consolidation of members without getting their individual permission.
Although workplace pension schemes won’t be initially forced to invest in UK assets, if they are not doing so then the government reserves the right to, in future, mandate a minimum investment into UK plc.
Local government pension schemes
The government wants to consolidate the Local Government Pension Scheme. This is currently administered by 86 separate local authorities and will be reduced to six ‘pools’ across the regions of the UK.
Value for money
The value for money framework is a joint initiative from the FCA and TPR to bring in some standard ways of measuring whether members are getting value for money from their workplace pensions. Schemes will have to mark themselves against their peers on three sets of metrics – charges, investment performance and customer service. The results will be published and if schemes fall short then they will have to act, to improve their offering or even to consolidate into a larger scheme.
Small pots consolidation
The goal is to automatically consolidate small pension pots (initially under £1,000) from automatic enrolment schemes when no contributions have been made for 12 months and no active choice has been made by the member. These pots will move to 'automatic consolidator' schemes, likely large megafunds.
Guided retirement
Trustees of occupational pension schemes will soon be required to offer suitable retirement income solutions to members nearing retirement. Trustees must present a curated selection of options, and if members are disengaged, place them in a default solution. Multiple default solutions may be operated, requiring trustees to match members to the appropriate one based on their own circumstances. Members should be informed about the default solution early in their pension journey and can opt out before or after accessing their pension pot.
