What is in the government's pensions review?

04 September 2024

Written by Retirement Line

Chancellor Rachel Reeves has launched the government’s comprehensive pensions industry review. She has labelled her plans as a “big bang of reforms to unlock growth, boost investment and deliver savings for pensioners”. 

The government's review is part of a broader strategy to modernise the UK's financial landscape. The review will focus on developing policy in four areas, which are:

• Consolidating defined contribution (DC) schemes.

• Tackling “fragmentation and inefficiency” in the Local Government Pension Scheme.

• Delivering value and better outcomes in retirement.

• Encouraging investment in UK assets.

As reported by PensionsExpert.com, phase one of the Pensions Review - which is currently underway - will also consider ways to boost investment returns for DC savers, in addition to fiscal impacts and support for the gilts market.

£11,000 boost to average DC saver

Defined contribution (DC) schemes are the main type of workplace pensions in the UK. The take-up of DC schemes has increased in recent years following the introduction of auto-enrolment. This has made paying into a pension scheme a default arrangement for millions of employees. 

According to the government, DC schemes are projected to hold £800 billion in assets by 2030. The Chancellor’s review will explore ways to encourage greater private sector investment in infrastructure and innovation. 

Even a modest 1% shift of these funds towards productive investments could inject £8 billion into the economy and yield higher returns for savers. 

The government intends to introduce a Pension Schemes Bill that will introduce a ‘value for money test’ for providers. According to the government, this should result in fewer, well-performing and well-governed schemes, leading to more productive investment of funds.

Individuals who have multiple small pension pots from different employers will see their schemes consolidated. This will help them manage their money and potentially increase investment performance.

Through these changes, the government expects to boost the pension pot of an average earner who saves over their lifetime into a DC scheme by over £11,000.

Additionally, pension schemes will be required to offer members retirement products that deliver a steady income upon retirement, rather than just a lump sum. The government believes this will improve saver outcomes and likely result in funds being invested for longer periods. This in turn could potentially boost economic growth.

Detailed examination of the Local Government Pension Scheme

The review also includes a detailed examination of the Local Government Pension Scheme (LGPS). This is a huge scheme, valued at £360 billion. One aim of the task force is to set the scene for merging the 87 individual schemes within the LGPS.

The LGPS, the world's seventh-largest pension fund, spends a staggering £2 billion on fees every year. Merging multiple schemes into one could reduce these fees, plus enable broader investment into UK assets.

A shift from investing abroad

The review is being led by Pensions Minister Emma Reynolds, who stated:

"As the first ever joint Treasury and DWP minister, I am uniquely placed to tackle the twin challenges of productive investment and retirement outcomes.

“Over the next few months, the review will focus on identifying any further actions to drive investment that could be taken forward in the Pension Schemes Bill, before then exploring long-term challenges to ensure our pensions system is fit for the future.

“There is so much untapped potential in our pensions markets, with an industry worth around £2 trillion. The measures we have already set out in our Pension Schemes Bill will help drive higher investment and a better deal for our future pensioners,” added Reynolds.

Industry experts comment on reforms

Barry O’Dwyer, the chief executive of Royal London, sounded a word of caution to the Government against using Britain’s £3 trillion pension pot as a tool to hit growth targets. He said: “It is important to remember the primary role of pensions is to fund customers’ retirement.”

He added: “We are encouraged that the next phase of the review will examine retirement adequacy, as creating a long-term plan for increasing contributions will have a major impact on improving retirement outcomes and helping to finance growth.”

The Association of British Insurers Director General Hannah Gurga said: “This review is an important opportunity to provide much needed long-term strategy for the significant role the UK pensions sector plays in investment and economic growth.

“We welcome the holistic approach with the interests of savers going hand in hand with further boosting investment in the UK. Good outcomes for savers and providing stability must ultimately be at the heart of the reforms and we look forward to working with the government to achieve this.”

Sources:

Chancellor launches comprehensive review of the pensions industry: Chancellor vows 'big bang on growth' to boost investment and savings. Gov.uk. Accessed 05 August 2024.

Pension Schemes Bill to include scheme consolidation: Pension scheme shake-up may add £11,000 to retiree savings. The Guardian. Accessed 05 August 2024.

Barry O’Dwyer heeds word of caution to Government: Focus on long-term strategy delivers increase in profits. Royal London. Accessed 05 August 2024.