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Measures to help people boost their pension pots have been welcomed by industry experts – but they said there is more work to do.
The Pensions Schemes Bill aims to support more than 15 million people who save in private sector schemes to receive better outcomes from their pension assets.
The Bill, set out in the King’s Speech, aims to encourage pensions consolidation and put a focus on value and outcomes for scheme members. The legislation forms part of wider plans aimed at boosting economic growth.
It is hoped the moves will enable pension schemes to invest in a wider range of assets, driving growth.
Measures include preventing people from losing track of their pension pots by automatically bringing small pots together. This could also benefit pension schemes, which have been required to manage some loss-making pots.
Savers rightly expect to receive good value for money from their schemes, so the emphasis on fund performance - in particular the difference between the best and worst-performing default funds - effectively puts the worst performers on notice that they need to up their game— Tom Selby, AJ Bell
A standardised test will also be introduced that trust-based defined contribution (DC) schemes will need to meet to demonstrate they are delivering value.
This should leave a smaller number of well-governed schemes and help improve outcomes for savers.
The Financial Conduct Authority (FCA) will ensure the framework is applied consistently.
Pension schemes will also be required to offer retirement products, so that people can have a pension and not just a savings pot when they stop work.
Duties will be placed on trustees of occupational pension schemes to offer a retirement income solution or a range of options, including default investment options, to members.
The Government believes that is likely to lead to more funds being invested for longer, giving the potential for investments in productive assets.
The Bill will also have an impact in consolidating the defined benefit (DB) market through “super funds”. This will offer greater protection for members in closed legacy DB schemes from the risk of losing part of their pension if their employer goes bust.
Tom Selby, director of public policy at AJ Bell, said the legislation “will put millions of people’s pension pots at the heart of the new Government’s drive to boost investment in the UK and ultimately drive long-term economic growth.
“The claim that the measures in the Bill could deliver bigger pensions needs to be taken with a pinch of salt, as ultimately this will depend on the performance of your investments.”
Mr Selby added: “Savers rightly expect to receive good value for money from their schemes, so the emphasis on fund performance – in particular the difference between the best and worst-performing default funds – effectively puts the worst performers on notice that they need to up their game.”
Mr Selby also said the Government needs to get “fully behind” pensions dashboards, which will eventually help people to see all their pensions in one place online.
He continued: “When it comes to turning your pension into a retirement income, the Government says it plans to require all occupational pension schemes to offer a retirement income solution to members.
“While we don’t have detail on exactly what this will mean, there are many occupational schemes that do not offer drawdown to their members, meaning lots of people will need to transfer in order to take a flexible income.”
Mr Selby also said that questions remain around the scaling up of automatic enrolment, adding: “There is wide agreement that minimum contributions under auto-enrolment will need to rise.”
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the Bill “heralds positive news for people’s pensions, with simplicity and greater flexibility…
“Boosting retirement outcomes through a leaner, more efficient system is at its heart.”
What matters to most savers is the performance of the largest schemes— Sir Steve Webb
Sir Steve Webb, a former pensions minister who is now a partner at consultants LCP (Lane Clark & Peacock), said: “Perhaps inevitably, it will take time before we see how the new Government’s agenda differs from that of its predecessor.
“But this does mean that any distinctive policies will have to await legislation later in this Parliament and may take time to have effect.”
On the subject of “value for money” measures to drive out under-performing schemes, Sir Steve added: “Whilst the Government understandably wants to drive out the smallest pension schemes, some of which may not be well-run or delivering a good return, it is important to remember that the vast majority of people are not saving in small pension schemes.
“What matters to most savers is the performance of the largest schemes, including industry-wide master trusts.”
He said further action may be needed on the consolidation of small pension pots, adding that people with slightly bigger pots could still see them being scattered.
Kirsty Anderson, retirement specialist at Quilter, said: “It’s important to push ahead with this legislation to ensure the market works best for savers and it also helps to lay the groundwork for a shake-up to auto-enrolment.
“A big issue for pension providers is dealing with small pots, especially those less than £1,000.
“These can actually lose money for providers due to administrative costs. On average, it costs about £20 annually to administer a deferred pension pot.
“For a pot of £350, if a provider is only recouping £1.40 per year through a 0.4% annual charge, this can quickly turn into a loss.”
Patrick Heath-Lay, chief executive of People’s Partnership, provider of the People’s Pension, said: “Plans to consolidate the pensions sector, require default retirement products and benchmark pension schemes for value for money have been discussed for some time.
“Moving them forward quickly will be challenging for the industry and we expect the pensions sector to change rapidly over the course of this parliamentary term – these measures could be very positive for savers.
“A value-for-money test focusing on positive outcomes for savers will drive the pensions sector to focus on what it’s delivering for the millions of people it serves.”
Rob Yuille, head of long-term savings policy at the Association of British Insurers (ABI), said: “We look forward to working closely with the Government to deliver on our mutual priorities for pensions.
“Plans for a Pension Schemes Bill are welcome, alongside its promised review, and we support ambitions for successful, enduring policies that secure the best outcomes for savers as well as supporting the UK’s economic growth.
“Any successful pension reform must work for the long term, be evidence-based and have savers’ interests at its heart.”
