- Sweeping reforms to pensions aimed at driving more investment into ‘productive’ UK assets will require all workplace schemes to operate at ‘megafund’ level by 2030, with schemes holding at least £25 billion in assets, the government says
- Smaller private sector workplace schemes will likely be forced to consolidate, with ministers claiming this greater scale could add £6,000 to the average value of someone’s pension in retirement
- The £392 billion Local Government Pension Scheme (LGPS), which is currently administered by 86 separate local authorities, will be reduced to six ‘pools’ across the regions of the UK under the plans
- The Pension Schemes Bill will also create a ‘reserve power’ in legislation potentially allowing government to set mandatory asset allocation targets if private sector workplace schemes do not voluntarily increase investments in UK assets
- This ‘sword of Damocles’ power creates the strongest possible nudge for pension schemes to ‘voluntarily’ invest more of members’ hard-earned retirement pots in UK plc
- Ministers taking risks with other people’s pensions urged to deliver certainty through a ‘Pensions Tax Lock’ at the Budget later this year
Tom Selby, director of public policy at AJ Bell, comments:
“The government’s workplace pensions agenda has been clear for a long time now – cajole pension schemes, by hook or by crook, to invest a greater share of millions of Brits’ hard-earned retirement pots in UK plc. These so-called ‘Mansion House’ reforms were kick-started by the previous Conservative government and are being accelerated under Sir Keir Starmer’s Labour administration, with ministers placing workplace pensions front-and-centre of an increasingly desperate search for economic growth.
“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’ and voluntary agreements by those schemes to boost their allocation to UK-based investments, with a significant emphasis on private equity and ‘productive’ assets.
“Perhaps most controversially, the government says it will create a ‘sword of Damocles’ power in legislation threatening to set mandatory asset allocation targets if schemes do not do this voluntarily. In reality, this essentially puts a gun to schemes’ heads and will create those mandatory targets in all-but-name.
“Many of the claims about the benefits of these reforms to pension savers and retirees need to be taken with a fistful of salt. 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.
“Given the risks being taken with other people’s pensions, the least the government can do is deliver stability in the tax system through a commitment to a ‘Pensions Tax Lock’, pledging not to alter tax relief or tax-free cash entitlements, at least for the rest of this Parliament. This certainty would give people greater confidence to plan for the long term without having to worry about the goalposts being moved at every fiscal event.”
What has the Treasury said?
Reforms set to be introduced through the Pension Schemes Bill will mean all multi-employer defined contribution pension schemes and Local Government Pension Scheme pools operate at ‘megafund’ level, managing at least £25 billion in assets by 2030.
The Treasury also said that defined contribution schemes will be given more freedom through legislation to move savers into better performing funds, enabling bulk transfer of assets into the megafunds while ensuring savers’ interests are always protected.
Schemes worth over £10 billion that are unable to reach the minimum size requirement by the end of the decade will be allowed to continue operating, as long as they can demonstrate a clear plan to reach £25 billion by 2035.
