The government has published the Pension Schemes Bill, which sets out major changes to the industry.
The bill is designed to drive up efficiency, improve returns, cut costs to savers, and encourage investment in UK-based assets and projects.
Central to the plan is the consolidation of small pots into ‘megafunds’ with at least £25bn in assets. There are estimated to be 13 million small pension pots under £1,000 that will be swept up into the new vehicles.
The Local Government Pension Scheme will be directed impacted by the bill. It is administered by 86 separate local authorities, and this will be reduced to six pools across the regions of the UK.
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Pension schemes will also face new requirements to set out default methods for pensions holders to access their money that will apply unless opted out of.
The bill is also aimed at increasing pension scheme access to private assets and large infrastructure investments.
Rachel Vahey, head of public policy at AJ Bell, said: “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 £25bn.
“The ultimate aim is to channel pension investment into UK plc to help balance the country’s accounts.”
Vahey is far from convinced the reforms will benefit pension savers overall.
“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.”
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“The aim of the value for money framework is to deliver an easy way for schemes to compare themselves against their peers,” she continued.
“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.”
James Carter, head of platform policy at Fidelity International, said: “This Pension Schemes Bill will define what the government achieves for pension scheme members in this parliament.
“It represents an important step forward for a wide-ranging package of pension policies, but for many of them much work is still ahead to bring them to reality.
“Deciding how to use pension benefits is arguably the most complex but one of the most important financial decisions facing members of pensions schemes, often genuinely engaging with their pensions for the first time when looking to draw benefits.
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“Pension scheme trustees are best placed to determine what the general needs of their typical member are, but a default retirement solution can never provide for the wide variety of different circumstances and needs of individual members.”
Steven Cameron, pensions director at Aegon, said: “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.”
