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Ministers will unveil a sweeping overhaul of Britain’s pensions system on Thursday aimed at unpicking problems created by previous rules and boosting the retirement savings of millions of people.
The pensions bill will cover six areas of reform and include a “reserve” power to force pension schemes to invest more in the UK if they fail to meet a voluntary commitment.
One of the most notable features of the bill — announced in the King’s Speech last July and the first since 2021 — will be the merging of defined contribution pension pots worth £1,000 or less into one scheme.
Ministers estimate the measure will boost retirement savings for the average worker by around £1,000, and save businesses £225mn a year in unnecessary administration.
The introduction of auto-enrolment in 2012 prompted a proliferation of small pots, with over 13mn in the UK now valued at £1,000 or less and around 1mn new small pots created each year.
For those approaching retirement, the bill will require defined contribution schemes to offer clear default options for turning pension savings into retirement income.
Helping individuals appropriately draw an income from their savings has become a growing problem following “pensions freedoms” introduced by George Osborne in 2015 that allowed pensioners to collect their entire savings in a lump sum.
The move “has the potential to be one of the most significant interventions industry can make to help people maximise their savings,” said Gail Izat, a managing director at Phoenix Group’s Standard Life.
Pensions experts welcomed the proposals but noted there would be nothing included on increasing the amount of money being paid into long-term savings schemes, which is viewed as key to improving retirement wealth.
Sir Steve Webb, a former pensions minister and partner at consultancy LCP, said the bill was “worthy” but ignored the “elephant in the room of inadequate pension savings”.
The bill will also introduce a new system — which has been consulted on for years — to show how well pension schemes are performing under a “value for money” framework, to help savers assess the value of schemes against their peers.
Liz Kendall, work and pensions secretary, said the bill was about “securing better value for savers’ pensions and driving long-term investment in British businesses to boost economic growth in our country”.
Other measures in the bill include new rules to make it easier for trustees of defined benefit pensions to release so-called surplus in schemes back to employers.
It will also introduce a legislative framework for defined benefit “superfunds” that help DB schemes consolidate without having to meet the threshold to sell their assets and pension obligations to an insurer.
Plans for multi-employer defined contribution “megafunds” of at least £25bn, laid out in the pensions investment review published last week, will also become law.
Last month, 17 of the UK’s largest defined contribution pension providers pledged to invest at least 5 per cent of their assets in UK private markets by the end of the decade. Reserve powers in the bill to set asset allocation targets are designed to ensure this commitment is met.
The government had promised a review into pensions adequacy — expected to look into auto-enrolment rates — by the end of last year but it was delayed. Pensions minister Torsten Bell said last week it would be launched “soon”.
Former minister Webb warned that it would take years for such work to produce results.
“Any legislation off the back of that review could take years to implement,” he said. “Time is running out for people already well through their working life to have the chance for a decent retirement.”
