The government has introduced the Pension Schemes Bill, which is designed to make pensions easier to understand and manage, and drive better value over the long term.
The bill will work to ensure savers get good returns and drive economic investment by requiring defined contribution (DC) schemes to prove they are value for money to avoid underperforming schemes, simplifying retirement choices by all pension schemes offering default routes to a retirement income, and consolidating and professionalising the Local Government Pension Scheme (LGPS), with assets held in six pools to invest in local area infrastructure, housing and clean energy.
The bill is about securing better value for savers’ pensions and driving long-term investment in British businesses” – Liz Kendall, work and pensions secretary
It will also bring together small pension pots worth £1,000 or less into one scheme certified as delivering good value, create new rules for multi-employer DC scheme megafunds of at least £25 billion, so bigger and better pension schemes can drive down costs and invest in a wider range of assets, and increase flexibility for defined benefit (DB) pension schemes to safely release surplus worth £160bn.
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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.”
Matthew Arends, partner and head of UK retirement policy at Aon, added: “The Pension Schemes Bill has been a long time coming and many of the measures in it have been trailed previously, including allowing DB schemes to access surplus ahead of wind-up, the creation of DC megafunds, the formal introduction of the Value for Money framework to DC pensions, and the measures to ensure further pooling within the LGPS.
“One of the most intriguing measures is the introduction of default pension benefit solutions, meaning DC default decumulation options. This extends the concept of defaults within DC pensions from joining via auto-enrolment, accumulation via default funds through to retirement with the new defined pension benefit solution. Along with measures to allow consolidation of DC pots of less than £1,000 and the creation of megafunds, we are seeing the DC market maturing.”
Pete Glancy, head of pensions policy at Scottish Widows, said: “The average person is forecast to have 11 pension pots at retirement, while some will have dozens. This initiative will see even the smallest pension pots tidied up automatically, which will be hugely beneficial for pension savers across the board. We expect this initiative to complement pension dashboards. It’s likely that as people become aware of their multiple pension pots through a pension dashboard that they will increasingly choose to consolidate pots, large and small, into whichever product or scheme is offering the best performance.”
Forgotten pension pots
Nausicaa Delfas, chief executive of The Pensions Regulator, added: “The Pension Schemes Bill is a once-in-a-generation opportunity to address unfinished business in the UK pension system. Making sure all schemes are focused on delivering value for money, helping to stop small, and often-forgotten pension pots forming, and guiding savers towards the right retirement products for them, will mean savers benefit from a system fit for the future.”
Paula Llewellyn, CEO, DC & Workplace Savings added that the Bill was a “significant step towards improving outcomes for savers. Pension adequacy is a big concern – especially against the backdrop of ongoing cost of living pressures, so enhancing engagement and simplifying pension choices is crucial.”
“Consolidating small, forgotten pension pots into one scheme could make retirement saving more manageable and rewarding, and potential integration into the Pensions Dashboard could make for an even clearer financial picture.
“We also support the government’s move to ensure all savers have access to the full range of retirement income solutions.
“But to really address adequacy we need to help people save more and start saving sooner. I’m looking forward to engaging with the second phase of the pensions review to support measures which will help more people to have the retirement they want.”
Warning for ministers
Last month the newly formed Pension Security Alliance, made up of insurers including Just Group, the Pension Insurance Corporation and consultant John Ralfe, as well as organisations representing pensioners, claimed some of the Bill’s provisions could turn pension schemes into “piggy banks for others to dip into”.
In a statement, it said: “Extraction before members’ benefits have been secured runs the risk of those schemes running short of money if financial conditions change. In that case, some schemes could collapse.”
Additional reporting by Adam McCulloch
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