Planned changes to the way our pensions are invested could see retirement incomes boosted by up to £1,000, it's been claimed. Here's everything you need to know about the Government's tweaks to workplace pensions.
Workplace pensions have been a big success when it comes to getting people saving for retirement.
Millions of people now have some sort of pension in place, which they otherwise would not, while the amounts saved in those pots have also been boosted by employer contributions.
The schemes may be set to improve too, after a busy week for the Government saw a series of revamps and expansions announced around how workplace pensions operate.
Let’s take a look at what the Government wants to do, and what it may mean for your income in retirement.
The ‘Mansion House’ reforms
First off we had a series of reforms announced by Chancellor Jeremy Hunt in a speech in Mansion House.
Essentially the Government has secured an agreement from the nation’s biggest workplace pension providers to invest some of the funds they handle into ‘unlisted equities’.
By 2030 the providers have pledged to put 5% of their funds into these investments, which tend to be illiquid, meaning they are not easy to sell up, but have the potential to provide greater growth levels.
Hunt pointed to the fact that similar workplace pension programmes, like the one in Australia, deliver better retirement incomes which he suggested was due to the fact the funds are invested in wider ranges of assets.
The Government reckons this change could boost the typical pension income by over £1,000 a year.
Alongside this, there will be a new ‘Value for Money’ framework which pushes pension firms to ensure that their decisions are based on overall long-term returns and not just costs.
Pension schemes that don’t deliver the best possible outcomes will be wound up into larger schemes which have a better track record.
The moves have received a cautious welcome from the pension industry.
These unlisted assets have the potential to provide greater returns to savers, but the reality is that they are riskier.
It’s not exactly out of the question that savers will end up worse off as a result, should those investments underperform, compared with if the money was kept in listed equities.
Opening up workplace pensions to more savers
The way that workplace pensions are invested is not the only thing set to change though.
The Government also announced this week plans to expand how the automatic enrolment scheme works, removing limitations around how much workers need to earn before they qualify.
Currently, workers must earn £6,240 before their employer is forced to open a pension in their name and contribute towards it, but the Government is now planning to ditch it.
Alongside this, the minimum age for qualifying for workplace pensions will drop from 21 to 18.
The idea is this will help people build a bigger pension pot during their working life, and hopefully benefit from a more comfortable retirement.
Consolidating smaller pensions
Finally, plans have also been outlined to tackle the growing issue of deferred small pension pots.
There are an awful lot of small pension pots which have been ‘disconnected’ from their owners, and the numbers are only increasing.
Analysis from the Pensions Policy Institute shows that between 2018 the number of small pensions that have essentially been lost has surged, with the value moving from £19.4 billion to £26.6 billion.
The workplace pension scheme has only exacerbated the problem ‒ as people move jobs they end up with a new pension, and the risk of losing touch with the old one.
It’s too easy for savers to then end up with a substandard income in retirement as a result.
The initial focus here will be on pots worth less than £1,000.
Pots worth less than this, and which savers are no longer contributing to, will be transferred to a ‘consolidator’ automatically, though savers will have the option of opting out of this.
The thinking is that it will be harder for savers to be disconnected from their various pensions as a result.
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What these changes mean for you
There is some positivity here.
Opening up workplace pensions is a welcome move, as are the measures around small pension pots.
However, it’s undoubtedly the case that keeping on top of the value of our pension savings ‒ including the various pots in our names ‒ would be somewhat easier if we had pension dashboards.
Dashboards were promised years ago, but have been delayed repeatedly. It now looks like they will not be live until 2026 at the earliest.
Combining the dashboard with these measures would be welcome, since it’s all too possible for savers to lose touch with slightly larger pension pots and end up seeing their value eroded away by charges over time.
As for the expansion of assets that workplace pensions invest in, the proof will be in the pudding.
While they may indeed result in larger pension pots, the motivation here is really about sparking economic growth rather than helping pension savers.