The government has unveiled widespread plans to shake-up the £2 trillion UK pension saving market, expected to benefit 20 million workers. Here’s everything you need to know about the changes and how you could be affected.
What is the pensions bill?
The Pension Schemes Bill is designed to “support working people plan for their retirement by making pensions simpler to understand, easier to manage, and drive better value over the long term”, the government said.
It deals with the thorny issue of what to do about millions of small workplace pension pots of £1,000 or less, as well as forcing pension schemes to prove they are giving savers value for money.
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It also makes pension schemes create clear routes for people to choose how to invest and withdraw their money at retirement.
Liz Kendall, Work and Pensions Secretary, said: “Hardworking people across the UK deserve their pensions to work as hard for them as they have worked to save, and our reforms will deliver a huge boost to future generations of pensioners.
“The Bill is about securing better value for savers’ pensions and driving long-term investment in British businesses to boost economic growth in our country.”
The Pension Schemes Bill also includes previously announced measures to create so-called ‘megafunds’ that have the heft to invest in a wider range of assets, and could leave savers £6,000 or more better off in retirement.
We look at the proposals in the Bill and breakdown what it means for you.
How will the pensions bill affect my retirement savings?
The new pensions bill could affect your pension savings in a few ways, especially if you have a small pot or you don’t think you are currently getting good value from your workplace pension.
What will happen to your small pots of savings?
Millions of savers with workplace pensions with less than £1,000 in them will have their pots brought together into a single scheme, under plans in the Pension Schemes Bill.
There are around 13 million small pension pots built up under auto enrolment. In future these will be automatically consolidated without the member having to give permission.
The plan is to combine them into one pension scheme that is “certified as delivering good value to savers”, making pension saving less hassle and more rewarding.
Rob Morgan, chief investment analyst at Charles Stanley, said: “Too often pension savers forget about very small pots. Consolidation of these is beneficial for individual consumer outcomes as well as to the wider industry’s ability to serve customers appropriately and drive economies of scale.
“With 13 million small pots holding £1,000 or less, and the number increasing by around one million a year, the industry was on an unsustainable path of fragmentation. Challenges lie ahead in terms of the implementation of a commercial model, but the direction of travel in terms of tackling this is encouraging.”
Rachel Vahey, head of public policy at AJ Bell, said while the plan may help some people, 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,” she added.
Are workplace pensions value for money?
The Bill also introduces a new system to show how well pension schemes are performing, with the aim of helping savers understand whether their scheme is giving them good value and protecting them from getting stuck in underperforming pension schemes for years on end.
Pension scheme 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.
Sankar Mahalingham, managing director of LawDeb Pensions, said: “Schemes need to ensure the interests of their members are the centre point of any decisions, which is why it’s positive to see that the government will challenge schemes delivering poor returns.”
Under a VFM framework, schemes will be better able to compare themselves against their peers, with those falling short made public.
Vahey said: “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.”
Default options at-retirement
For those approaching retirement, the Bill will require schemes to offer clear default options for turning savings into a retirement income. The aim is to give people clearer, more secure routes to decide how they use their pension money over time.
Pension 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.
The Financial Conduct Authority has gone the way of introducing targeted support to help them make these complicated decisions. But now the government has chosen to put occupational scheme members into a default solution giving them a set outcome.
Vahey said there is “no doubt” pension scheme members need help deciding what to do with their pension pot.
But she added: “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.”
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