Savers could be £6,000 or more better off in retirement under plans to create so-called pension ‘megafunds’ that have the heft to invest in a wider range of assets, the government has said.
The Treasury aims to double the number of megafunds – pension schemes with more than £25 billion invested – by 2030 to boost investment in the UK and improve returns for savers.
It will do this by forcing smaller pension schemes to consolidate. By the government’s calculations this will give savers a 0.06% reduction in fees – and allow the newly larger megafunds to invest more in more high-returning areas like infrastructure.
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This means an average earner saving into a defined contribution pension, who is 22 and saves for their entire career until state pension age will see a £6,000 boost to their retirement pot, the Treasury estimates.
Multi-employer defined contribution pension schemes will be required to operate at megafund level. The £392 billion Local Government Pension Scheme, which has assets currently split over 86 administering authorities, will be merged into just six pools.
Pension 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.
Under the megafund plans, the government has said more than £50 billion of investment will go into UK projects – and in a shock move has said it will force a UK-bias in order to reverse decades of declining domestic investment.
Currently around 20% of defined contribution assets are invested in UK companies and projects, compared to more than 50% in 2012, the government said.
Seventeen of the UK’s largest workplace pension providers have already said they will voluntarily invest at least 5% of savers’ money in British private markets investments, under the so-called Mansion House Accord announced earlier this month.
Chancellor Rachel Reeves today said: “We’re making pensions work for Britain. These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses – the Plan for Change in action.”
What do the experts think of the government’s pension megafunds plan?
Some experts have issued warnings over “unprecedented” plans to mandate how and where pension schemes invest.
David Brooks, head of policy at consultancy Broadstone, said: “An explicit direction of travel towards mandating pension scheme investment into UK assets and infrastructure is a risky move – not least because the Treasury itself has had to admit that any gains for savers are unclear and likely to be limited.
“Savers will naturally be worried that their pension pots will not necessarily be invested with the best returns in mind but rather required to achieve specific allocations to Treasury-dictated geographies and sectors.”
Pension consultancy LCP welcomed reforms that could help to drive improved outcomes for savers from lower costs or accessing a wider range of investment options, but said the threat of government intervention to ‘mandate’ how pension schemes invest members’ money is “unprecedented”.
Laura Myers, partner and head of DC pensions at LCP said: “A greater focus on value for money is warranted and should not trouble the many well-run pension schemes in the UK.
“But the threat of the government telling trustees how they should invest is a step too far.
“Trustees draw on professional expertise to draw up an investment strategy which will best meet the needs of members, and this should never be over-ridden by the political priorities of the government of the day.”
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