- Multiple government consultations designed to help deliver chancellor Jeremy Hunt’s ‘Mansion House’ reforms closed yesterday
- Key reforms under consideration include creating a default consolidator for small pension pots and handing firms with defined benefit (DB) pension schemes greater flexibility to access surpluses
- Separately, a number of pension schemes have agreed to increase their allocation to private equity investments as part of the ‘Mansion House compact’
- These policies are part of a wider government effort to increase risk-taking in pensions and drive greater long-term economic growth
- Any changes need to balance the potential for boosting investor returns and supporting UK Plc with the associated risk to people’s retirement savings
Tom Selby, head of retirement policy at AJ Bell, comments:
“Rishi Sunak and Jeremy Hunt have their eyes firmly set on people’s pensions as they attempt to drive long-term economic growth. A whole range of reforms, from encouraging greater consolidation of small pension pots to handing firms greater flexibility to access DB pension surpluses, are aimed squarely at diverting a chunk of trillions of pounds of UK pension money into investments deemed more productive by the government.
“This is the context through which most of the ‘Mansion House’ announcements need to be viewed. Whether it’s establishing default consolidators to sweep up an estimated 12 million small pots worth £4 billion, pushing for DB schemes to combine and shift their investment approach away from bonds and gilts and towards ‘productive assets’, or the emphasis on value for money in DC pensions, the government is making no secret of its desire to use people’s pensions to get the UK economy out of the doldrums.
“While ministers wanting to corral pension money into the UK economy is understandable, there is a danger hard-working savers will simply be forgotten about in all of this. It is also important the benefits and potential risks of these reforms are carefully explained to savers.”
Consolidating small pension pots
“Automatic enrolment has been hugely successful in boosting the number of people saving at least something for retirement. However, the reforms have also exacerbated the small pots problem, with the number of pensions becoming disconnected from their owners ballooning by over £7 billion, from £19.4 billion to £26.6 billion, between 2018 and 2022.
“This surge in lost pots is piling pressure on the government to find a solution. Part of the proposed answer, set out in the Mansion House reforms, would see an estimated 14 million ‘deferred’ pots worth less than £1,000 automatically transferred to a default consolidator. The DWP reckons the total assets of these small pots are worth around £4 billion – money it hopes to nudge towards larger schemes which might then invest more of members’ retirement savings in the UK’s post-pandemic recovery.
“The government is focusing on small pots only here because automatically transferring someone’s pension without getting their permission first comes with real risks. It is possible, for example, that someone might have their retirement pot moved to a scheme with higher charges or worse investment performance, or both. While it is logical to look at ways to increase scale and efficiency in the pension system, protecting the consumer must be the number one priority.
“By restricting automatic transfers to sub-£1,000 deferred pensions, the DWP is hoping to mitigate this risk, as the impact of charge differentials in pounds and pence terms should be relatively small.
“However, in reality this complex solution will likely take a long time to build and savers will still lose track of where their retirement pots end up. Instead, we need a solution that breaks through this apathy and reunites people with their pensions. The government should focus on launching pensions dashboards to enable people to locate all their pensions, including small pots, and empowering them to consolidate their retirement pots quickly and simply.”
Defined benefit surplus flexibility – the next Maxwell?
“The suggestion that employers could be handed more flexibility to access defined benefit surpluses has, perhaps inevitably, set a few hares running, with some warning the plans could lead to mass Robert Maxwell-style raids on people’s pensions.
“While the shadow of Maxwell and other historic pensions scandals loom large, it is important to differentiate between a man who committed out-and-out pensions fraud and a call for evidence asking for views on whether the strict rules governing when a DB surplus can be accessed should be revisited.
“Clearly any proposals in this area will first-and-foremost need to ensure member benefits are not put at risk. DB schemes’ funding positions have improved substantially in the past year or so, in large part because of a dramatic rise in gilt yields. If employers were simply allowed to access this newfound surplus as though it were a windfall, that would present a clear danger to the finances of the scheme – particularly if gilt yields shifted in the wrong direction.
“This is why it is vital any extra flexibilities are tightly controlled and ensure the interests of pension scheme members remain protected.”
