Marvin OnumonuThe Government has set out plans that will require all workplace pension schemes to reach a minimum size of £25bn by 2030 to boost investment in UK assets.
Any schemes that fall short will have to merge, with ministers claiming bigger funds could add £6,000 to the average pension at retirement.
The £392bn Local Government Pension Scheme, now run by 86 local authorities, will be cut down to six pools across the UK.
Under the Pension Schemes Bill, the Government will also get a ‘reserve power’ to set mandatory investment targets in UK assets if schemes do not shift enough money voluntarily.
This could force pension funds to put more members’ money into UK businesses and infrastructure.
Tom Selby, director of public policy at AJ Bell, said: “The government’s workplace pensions agenda has been clear for a long time now – cajole pension schemes, by hook or by crook, to invest a greater share of millions of Brits’ hard-earned retirement pots in UK plc.
“These so-called ‘Mansion House’ reforms were kick-started by the previous Conservative government and are being accelerated under Sir Keir Starmer’s Labour administration, with ministers placing workplace pensions front-and-centre of an increasingly desperate search for economic growth.
“The Pension Schemes Bill hopes to achieve this revolution through a combination of consolidation of workplace schemes in the private sector and across local authority schemes into ‘megafunds’ and voluntary agreements by those schemes to boost their allocation to UK-based investments, with a significant emphasis on private equity and ‘productive’ assets.”
Selby added: “Perhaps most controversially, the government says it will create a ‘sword of Damocles’ power in legislation threatening to set mandatory asset allocation targets if schemes do not do this voluntarily.
“In reality, this essentially puts a gun to schemes’ heads and will create those mandatory targets in all-but-name.
“Many of the claims about the benefits of these reforms to pension savers and retirees need to be taken with a fistful of salt.”
He said: “While there may be some efficiency benefits to consolidation, these are difficult to quantify with certainty and reducing competition in the market may stifle incentives to deliver innovation.
“In addition, private equity investing is notoriously high cost and high risk, meaning it is entirely possible people will end up worse off if those investments fail to perform over the long term.
“There is a clear danger that conflating government policy goals – namely driving higher levels of investment in the UK and ultimately economic growth – with those of savers and retirees means the latter will be risked in pursuit of the former.”
He added: “It is vital the needs of pension scheme members remain the priority, rather than the needs of a government focused primarily on its growth agenda and ultimately to bolster its chances of re-election.
“Given the risks being taken with other people’s pensions, the least the government can do is deliver stability in the tax system through a commitment to a ‘Pensions Tax Lock’, pledging not to alter tax relief or tax-free cash entitlements, at least for the rest of this Parliament.
“This certainty would give people greater confidence to plan for the long term without having to worry about the goalposts being moved at every fiscal event.”
