Millions of workers will see a £6,000 boost to their retirement pots as part of Government plans to double the number of UK pension megafunds by 2030, the Chancellor has claimed.
Under new reforms from the Government, defined contribution (DC) pension funds and local Government pension scheme will be combined into larger megafunds which ministers argue will make it easier for them to invest in UK assets, boosting growth.
The Government said it could result in an investment of £50bn in infrastructure projects, which the Treasury hopes will boost the economy and drive-up higher returns for savers.
But experts have said this £6,000 figure “is marginal at best” and won’t mean much for savers in reality.
Here, we explore how they got to this figure, what it means for savers, and how much the extra cash can get you in retirement.
The figures, which come from the final report of the Pensions Investment Review, say that the suggested reforms will drive higher returns for savers, in part by cutting waste in the system.
For example, some systems still use paper systems and are not digital yet whilst transforming into fewer, larger funds should make processes slicker.
The £6,000 comes from the impact of consolidation, which the Treasury estimates to deliver at least a 6 per cent reduction in fees which are expenses levied by pension providers to cover the costs of managing and running your scheme.
The figure is over someone’s working lifetime and not annually.
The Government added the savings will come from increased allocations to productive assets such as infrastructure projects – for example, the funds could be moved from equities into projects like new house building.
It will apply to an average earner saving into a DC pension, who is 22 and saves for their entire career until state pension age. These people will see this boost to their savings before other measures in the Pension Schemes Bill are factored in.
By 2030, these schemes could be saving £1bn a year through economies of scale and improved investment strategies.
What does this mean for savers?
Of course, any boost to income is worthwhile, but Sir Steve Webb, former pensions minister and partner at LCP, said what’s striking about it is how “tiny” it is.
The £6,000 is not per year, it’s in your pot overall, and according to Sir Steve, is probably worth under £10 per week on your final pension.
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You could also only get this amount if you start paying into your DC pot at 22 and earn at least an average salary all of your life.
Sir Steve said: “None of this factors in the costs of some of the other measures which they are proposing which include creating a new process for the consolidation of micro pots which will cost a lot of money to administer, and which will presumably increase pension costs.
“They’re clearly aiming to provide a ‘retail’ message to go alongside all this talk of multi-billion-pound pension schemes, but to be honest, this £6,000 figure is marginal at best.”
Ros Altmann, who was also once pensions minister, said there is no guarantee that bigger funds perform better than smaller ones.
The main advantage is that costs should be lower and investment expertise in house greater. However, investing in infrastructure projects should bring some benefits of diversification and can offer inflation linked returns over time.
She added: “The costs of merging different schemes should also not be underestimated.”
The real answer is no one really knows yet.
David Robbins, senior consultant at Willis Towers Watson (WTW), said these are “unavoidably finger-in-the-air numbers when extrapolating over decades and decades”.
The Treasury did not publish exactly how they got to the £6,000 figure.
If the changes have the desired effect, there would be some benefit for 40-year-olds, for example, he said, just less than a 22-year-old as it does not affect returns in the past.
He explained: “Modelled gains would be higher for people who contribute more – whether that is because they get paid more or save a higher proportion of their salary.”
How much extra would this £6,000 get you in annuity terms?
An annuity converts your savings into an annual pension, giving you a guaranteed income when you retire that will be paid for the rest of your life.
They have become more popular again in recent years, and many people split their retirement savings between an annuity and income drawdown.
For a healthy person accessing their pension at 66, it works out that the additional £6,000 in someone’s pension pot would mean an extra £31 a month or £393 a year – nearly £4,000 over 10 years, according to calculations by Standard Life.
In the context of the full state pension being £230 a week, the additional return is positive.
Standard Life seem more positive about the outcome, saying for some the figure could be “life changing”.
Mike Ambery, retirement savings director at Standard Life, said: “The proposals align with the broader Government push to introduce a value for money framework that will give savers additional scrutiny as to whether their pension is delivering for them.
“The consolidation proposals represent a significant moment for UK pensions, but a great deal of work lies ahead to make them happen and in a way that supports better outcomes for pension savers.”
Mr Robbins pointed out that in terms of annuities, if someone qualified for an enhanced annuity – for individuals whose health and lifestyle factors might reduce their life expectancy – and may anticipate a higher income, would get more.
He said: “If they keen the money invested, those individuals would get more. Of course, any boost to income is worthwhile.”
The Treasury have been contacted for comment.
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