Government 'megafund' pension plans could give £6k boost to savers
Plans to double the number of UK pension "megafunds" by 2030 could see workers get a £6,000 boost to their retirement pot, the government has said.
The UK Treasury confirmed plans on Thursday to expand the number of UK pension megafunds in the next five years. Under reforms set to be introduced through the Pension Schemes Bill, the government said that multi-employer defined contribution and local government schemes will pool to operate at megafund level, managing at least £25bn in assets by 2030.
The Treasury said that evidence from Australia and Canada showed that this size enabled pension funds to invest in large infrastructure businesses and private businesses, both boosting the economy and potentially driving higher returns for savers.
The government said that this would help drive more than £50bn in investment for UK infrastructure, new homes and fast-growing businesses. This comes on the back of the government's recent announcement of a new agreement, known as the Mansion House Accord, in which Britain's biggest pension funds committed to invest 5% of assets in the UK.
On Thursday, the government also published the final report from its Pensions Investment Review, setting out its final policy decisions following on from feedback provided to its consultation. It said that figures from the report showed that these reforms would drive higher returns for savers, "in part by cutting waste in the system".
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According to the Treasury, these schemes could be saving £1bn a year by 2030 through economies of scale and improved investment strategies. As a result, the government said average earner who saves over their career could see a £6,000 boost to their defined contribution pension pot. That's based on its estimate that this megafund consolidation could deliver at least a six-basis-point reduction in fees, as well as an increase in allocations to "productive" assets such infrastructure projects.
"We're making pensions work for Britain," said chancellor Rachel Reeves. "These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses — the Plan for Change in action."
Meanwhile, deputy prime minister Angela Rayner said that the "untapped potential of the £392bn Local Government Pension Scheme is enormous. Through these reforms we will make sure it drives growth and opportunities in communities across the country for years to come"
In Thursday's announcement, the Treasury also said that a "backstop power [is] set to be taken in the Pension Schemes Bill to protect the interests of LGPS [local government pension scheme] members and local taxpayers where necessary by directing an administering authority to participate in a specific investment pool."
According to a Financial Times report, officials confirmed that this could include specific targets to UK assets. A spokesperson for the Treasury had not responded to Yahoo Finance UK's request for comment at the time of writing.
Matt Tickle, chief investment officer at Barnett Waddingham, said: "The main concern for schemes following the government's wide ranging pension announcements is the looming threat of 'mandation'.
"While the chancellor's 'backstop' power – which could compel funds to back British assets – appears to have deterred that threat for now, any move towards mandated investment is a blunt tool, leaving members and society as a whole at risk of poorer outcomes."
"That said, the fact that there is time gives some of the government's better policies, around planning reform, value for money and retirement pathways more space to succeed," he added.
"If they do, they could generate opportunities that pension schemes will willingly invest in. Efforts to improve the flow of investable opportunities are certainly positive, however there is still an urgent need to focus on reforms rather than enforcing mandates."
Helen Morrissey, Yahoo Finance UK columnist and head of retirement analysis at Hargreaves Lansdown, said: "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 really drive up member engagement with their pensions, improve decision making and boost outcomes."
"It's important to pick through the detail of the report and later regulation to see how this is supported," she said. "For instance, detail needs to be fleshed out on how the transition pathway for providers looking to reach scale by 2035 will work.
"If the market is to thrive, then there needs to be space for smaller, innovative providers. It's a lesson learned in the retail banking market where competition from smaller challenger banks has put pressure on larger incumbents to improve user experience and product offerings."
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