As discussed in our Pensions Spring Update, the Pensions Minister, Torsten Bell announced at the Pensions and Lifetime Savings Association (PLSA) Investment conference in March that he intends to lay the Pension Schemes Bill in parliament before the summer. The Bill seeks to target the wider changes outlined in the King's Speech in July 2024 and is set to legislate on several areas of pension policy including the automatic consolidation of defined contribution (DC) small pots, establishing the Value for Money Framework for occupational pension schemes and requiring DC occupational schemes to offer a default retirement solution. David Everett, LCP partner and head of pensions research has anticipated that the Bill will be "crammed to bursting with measures". However, we must remain patient until the Bill's introduction to fully understand the implications for the pensions industry.
The 'Small Pensions Pot Consolidator'
One of the key reforms to be introduced as part of the Pension Schemes Bill later this year is the small pensions pot consolidator.
The small pensions pot consolidator focuses on resolving the problem of 'forgotten' pension pots that many savers gather throughout their career as they transition between employers. Under the measures to be introduced, each individual small pot will be brought together and consolidated into one pension scheme certified to deliver good value to savers. The Government has stated that small pots cost the pensions industry an estimated £225 million annually in administrative costs, and so, in theory at least, this measure seeks to provide a solution for all as it aims to mitigate costs and put more money in people's pockets. The Pensions Minister is championing this consolidation initiative, predicting that it has the potential to enhance the average earner's income by around £1000 under their 'Plan for Change'
The Industry's Response to the Plans for the 'Small Pensions Pot Consolidator'
Overall, the pensions industry has generally welcomed the Government's plans for the implementation of the small pension pots consolidator – which has been referred to as "transformative" - but is understandingly wary of the work to be done to achieve this, recognising the associated hurdles.
Head of Retirement at Hargreaves Lansdown, Helen Morrissey, sees the initiative as a potential "gamechanger", however she has emphasised the importance of maintaining robust data and security protocols. Meanwhile, Hannah English, Head of DC Corporate Consulting at Hymans Robertson appreciates the proposal but highlights its "practical barriers", including the reuse of existing pensions dashboard systems and processes.
As ever, the devil will be in the detail, however from our perspective we hope that the Small Pensions Pot Consolidator is a success – whilst we are not of course financial advisers, the question of how to consolidate small pensions pots is something we are regularly asked about, by clients, colleagues – and indeed friends and family!
Other Key Reforms
Alongside the introduction of the 'Small Pensions Pot Consolidator', the Pensions Schemes Bill seeks to introduce a host of other legislative change across the pensions industry.
The establishment of the Value for Money Framework is one of the reforms on the Government's agenda. The Kings Speech outlined measures to ensure that savers are contributing to pension schemes that provide good value through the introduction of a standardised test for trust-based DC schemes to meet to demonstrate that they deliver good value for money.
Additionally, the requirement for DC occupational schemes to offer a default retirement solution has been set forth, placing duties on trustees of occupational pension schemes to offer this to their members to ensure that people have a pension pot rather than a mere savings pot when they reach retirement.
Moreover, recently the Chancellor Rachel Reeves proposed voluntary targets for pension funds to allocate 10% of their assets to private funds by 2030 and fund managers including Aegon UK, Aon, Aviva, Legal & General, Nest and the People's Pension have agreed to the new "Mansion House accord" which would see at least 5% of their assets allocated to UK investments with the aim of supporting British businesses. The accord does not mandate UK investments, but there are concerns that the Bill could allow the government to dictate fund allocations. Despite warnings from industry professionals, the Treasury has not ruled out making these voluntary targets mandatory. Some pension fund providers express caution about the Government's efforts to direct assets into British investments, which might result in lower returns for retirees compared to overseas investments and potentially breaching fiduciary duties.
Conclusion
It is understood that - due to capacity constraints - not everything which could be legislated for will make it into the Pension Schemes Bill. Further details and clarity as to the extent of the Bill's implications are anticipated soon. Notably, once the Bill is enacted, additional consultations within the industry will take place, with the new provisions anticipated to come into force well into 2026.
If you would like to discuss anything raised in this blog in more detail, or for support in making an application to the Pensions Regulator, please get in touch with a member of the pensions team or your usual Brodies contact.
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