Workers will gain a £6,000 boost to their pension pots because of a Government decision to push forward with pension “megafunds”, Rachel Reeves has claimed.
The Chancellor has confirmed plans to force pension funds to combine their assets into larger megafunds, with ministers arguing that the increase in scale will make it easier for them to invest in UK assets, boosting growth.
According to the Government’s pensions review, which has been published today, the reforms are designed to drive higher returns for savers, in part by cutting waste in the system.
Ministers want to double the number of UK pension megafunds by 2030, with the pensions review claiming that by that year, the schemes could be saving £1bn annually through economies of scale and improved investment strategies.
As a result, it says an average earner who saves over their career could see a £6,000 increase to their defined contribution benefit scheme through the creation of the megafunds.
Announcing the reforms, Reeves said: “We’re making pensions work for Britain. These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses – the Plan for Change in action.”
The changes will be introduced through the Pension Schemes Bill, which will mean all multi-employer defined contribution pension schemes and Local Government Pension Scheme pools will operate at a megafund level, managing at least £25bn in assets by 2030.
Under the current Local Government Pension Scheme, £392bn of assets is split over 86 administering authorities, but this will now be consolidated into just six pools.
The reforms are based on the example of Australia and Canada, with the UK Government claiming that larger schemes in those countries have allowed funds to invest in major infrastructure projects and private companies, stimulating economic growth.
It is aimed at reversing a decline in domestic investment from UK pension funds, with only about 20 per cent of defined contribution assets currently invested in the UK compared to over 50 per cent in 2012.
More than 40 “scale-up” businesses have signed a letter to the Chancellor hailing the reforms as a “significant milestone in ensuring British institutions back British businesses”.
The Government has separately obtained a voluntary commitment from pension funds to invest five per cent of their assets in the UK.
However, some pensions experts have said that political intervention in the investment decisions of funds will result in poorer returns for savers.
The Government also plans to free up as much as £160bn of surplus funds currently sitting in defined-benefit pension schemes.
Under the plans, rules will be relaxed to allow pension scheme trustees to agree with company sponsors that ‘surplus’ funds can be used in a variety of ways.
This could include improving benefits for existing members of the scheme, using surplus funds to boost the pensions of employees of the sponsoring employer and allowing funds to be returned to the company to be used to benefit the business.
Sir Steve Webb, a former pensions minister and partner at consultants LCP, said the move was a “red letter day”.
He said: “Pension scheme funding has been transformed in recent years, with the majority of schemes now in surplus and funding improvements locked in through low-risk investment strategies, meaning that they are here to stay.
“Pension scheme trustees will have a crucial role to play in ensuring that member benefits remain secure in the event of surplus funds being extracted, and guidance from the Pensions Regulator is likely to set sensible boundaries for these new freedoms.
“But the Government has clearly been bold in this area and this opens up the potential for this surplus money to be used more productively to benefit scheme members, firms and the wider economy”.
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