The King’s Speech later today will set out the government’s legislative priorities for the next 12 months, of which pensions are expected to be front-and-centre, according to AJ Bell.
King Charles is predicted to confirm plans to drive higher levels of investment in private equity via pensions.
The chancellor’s ‘Mansion House’ reform package includes: an agreement between major workplace pension schemes to increase investments in private equity, exploring handing defined benefit (DB) scheme sponsors greater flexibility to access surpluses and proposals to encourage consolidation of small pension pots.
Tom Selby, head of retirement policy at AJ Bell, said: “Today’s King’s speech is set to confirm key elements of the government’s so-called ‘Mansion House’ reforms, a sprawling package of measures focused on people’s workplace pensions with two central aims: to increase scale and encourage these schemes to invest more of members’ money in private equity.
“The government argues this can be a win-win for savers and UK Plc.
“It says pension pots could potentially be boosted over the long-term by higher returns, while the country as a whole will benefit from capital being deployed into more productive areas.”
However, there’s no guarantee private equity investments will deliver superior returns after charges to more mainstream assets.
Selby explained that this idea assumes any extra private equity exposure will be predominantly UK-focused and that the returns from this extra allocation will outstrip what could have otherwise been earned from more mainstream investments.
“The chancellor even went as far as claiming people would get pensions worth £1,000 a year more in retirement as a result of the reforms,” Selby said.
“While it is possible the utopian picture set out by Jeremy Hunt will become reality, there are no guarantees.
“The danger is the gamble simply doesn’t pay off and savers end up with smaller pensions than would have been the case if they had stuck with the approach originally agreed by their independent trustees.”
He added: “Were this scenario to play out, the decision to conflate government efforts to boost long-term UK growth with the goals of pension savers, who will likely be more interested in maximising the size of their retirement pot, will be viewed as a foolish one.”
Consolidating small pension pots
Automatic enrolment has been successful in boosting the number of people saving something for retirement.
However, the reforms have also exacerbated the small pots problem, with the number of pensions becoming disconnected from their owners ballooning by over £7bn, from £19.4bn to £26.6bn, between 2018 and 2022, according to AJ Bell.
“This surge in lost pots is piling pressure on the government to find a solution,” Selby said.
“Part of the proposed answer, set out in the Mansion House reforms, would see an estimated 14mn ‘deferred’ pots worth less than £1,000 automatically transferred to a default consolidator.
“The DWP reckons the total assets of these small pots are worth around £4bn – money it hopes to nudge towards larger schemes which might then invest more of members’ retirement savings in the UK’s post-pandemic recovery.”
The government is focusing on small pots only here because automatically transferring someone’s pension without getting their permission first comes with real risks.
AJ Bell explained that it is possible, for example, that someone might have their retirement pot moved to a scheme with higher charges or worse investment performance.
“While it is logical to look at ways to increase scale and efficiency in the pension system, protecting the consumer must be the number one priority,” he said.
“By restricting automatic transfers to sub-£1,000 deferred pensions, the DWP is hoping to mitigate this risk, as the impact of charge differentials in pounds and pence terms should be relatively small.
“However, in reality this complex solution will likely take a long time to build and savers will still lose track of where their retirement pots end up.”
AJ Bell argued that instead, a solution that breaks through this apathy and reunites people with their pensions is needed.
“The government should focus on launching pensions dashboards to enable people to locate all their pensions, including small pots, and empowering them to consolidate their retirement pots quickly and simply,” he added.
Defined benefit surplus flexibility
In his Mansion House speech, Hunt announced plans to enable UK pension schemes to invest in a broader range of assets and transform the investment role of DB pension funds.
The changes are aimed at both boosting the investment returns available to pensioners and driving capital into early-stage and unlisted companies.
Meanwhile, the suggestion that employers could be handed more flexibility to access defined benefit surpluses has, perhaps inevitably, “set a few hares running”, said Selby.
He said: “Clearly any proposals in this area will first-and-foremost need to ensure member benefits are not put at risk. DB schemes’ funding positions have improved substantially in the past year or so, in large part because of a dramatic rise in gilt yields.”
Selby explained that if employers were simply allowed to access this newfound surplus as though it were a windfall, that would present a clear danger to the finances of the scheme – particularly if gilt yields shifted in the wrong direction.
“This is why it is vital any extra flexibilities are tightly controlled and ensure the interests of pension scheme members remain protected,” he added.
sonia.rach@ft.com
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