New pension changes to help people keep retirement savings worth £1,000 or less in one pot
The DWP said the new pensions Bill is about securing better value for savers.
Reforms 'tidying up' pensions by building 'megafunds' and sweeping away 'micro' retirement pots have been outlined in a new parliamentary Bill. The UK Government said the Pension Schemes Bill will create 'bigger and better pension funds' and combine smaller pension pots.
Many people build up several small pensions during their working life which can be hard to keep track of as they switch jobs. The Bill will bring together micro pension pots worth £1,000 or less into one pension scheme.
For people approaching retirement, the Bill will require schemes to offer clear default options for turning savings into a retirement income.
There will also be new rules creating multi-employer defined contribution (DC) scheme megafunds of at least £25 billion, using economies of scale to invest in a wider range of assets.
The UK Government said defined benefit (DB) pension schemes will also have increased flexibility to 'safely' release a surplus worth collectively £160 billion, to support employers' investment plans and benefit scheme members.
Work and Pensions Secretary Liz Kendall said: '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.'
Chancellor Rachel Reeves described the legislation as 'a game changer'.
Pensions minister Torsten Bell said: 'Pension saving is a long game, but getting this right is urgent so that millions can look forward to a higher income in retirement.'
Sir Steve Webb, a former Liberal Democrat pensions minister who is now a partner at LCP (Lane Clark & Peacock), said: 'Whilst there are many worthy measures in the Bill, the biggest omission is action to get more money flowing into pensions.'
He continued: 'This issue is unfortunately on the back burner. Measures such as consolidating tiny pension pots are helpful tidying up measures, but do nothing to tackle the fundamental problem that millions of us simply do not have enough money set aside for our retirement.
'With every passing year that this issue goes unaddressed, time is running out for people already well through their working life to have the chance for a decent retirement.'
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown, said: 'The face of the UK pension landscape is changing, as this Bill ushers in transformative change. It seeks to deal with many of the issues that have dogged the industry over the years around cost, value, communication and performance. As MPs and Peers consider these changes, they must put the pension savers' interest at the forefront of their thinking.
'The coming years will usher in the pension mega fund era. This will shift the UK away from a plethora of small, fragmented schemes towards a streamlined set of pension mega funds able to boost retirement outcomes as well as the UK economy through increased efficiency, lower costs, and increased investment in UK assets. These are changes that the government estimates could put an extra £6,000 in people's pensions.
'These changes will be backed up by the Value for Money framework that seeks to shift the narrative away from cost as being the main determinant of value towards other issues such as investment performance and service. This will enable members to determine whether they are really getting value from their scheme.'
She continued: 'The work around small pots has the potential to be a real gamechanger for people's retirements, with pensions worth less than £1,000 being brought together in a default consolidator model. This, alongside the incoming pension dashboard will have a huge impact on the ongoing issue of lost pensions. Helping people to keep track of pensions from old jobs can have a huge impact on their retirement decision making and really improve outcomes.
'However, these reforms could go even further with the default consolidator model being adapted for a Lifetime Pension model over the longer term. This would enable people to effectively decide which provider receives their pension contributions throughout their career, so they don't move between providers when they change jobs.
"This could have a transformative effect on people's retirements and put the member at the centre of the industry. Having their pensions in the same place and watching them grow will really boost their engagement as well as competition across the industry."
Ms Morrissey added: "Ensuring a competitive environment will also be key to the pension mega fund reforms. While scale is important in delivering better outcomes for savers, it must not come at the cost of reducing competition, member choice and much needed innovation. This has the ability to drive-up member engagement with their pensions, improve decision making and boost outcomes.
"With the changes planned from the advice guidance boundary review and pensions dashboards coming on stream, there's also a big opportunity to transform how we all engage with our pensions. The push for scale shouldn't stifle the innovation that can flow from these regulatory changes.'
Nausicaa Delfas, chief executive of the Pensions Regulator, said: '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.'
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