Labour ministers urged to be clearer on small pension pot plans
The UK government needs to be more coherent and take extra care with pension schemes before it consolidates small pension pots, a leading industry group has warned.
The Department for Work and Pensions (DWP) last week unveiled plans to ease costs by automatically combining small pots holding less than £1,000 into one scheme. Individuals will hold the right to opt out.
The government says there are around 13m of these kinds of pots, with savings of around £225m able to be made for businesses as admin costs are reduced.
But the Association of British Insurers (ABI) has suggested that the government needed to give pension funds and individuals greater protections before the plans come into effect.
“Schemes and individuals need to be able to transfer savings efficiently and safely, so further action is needed to support them in the meantime before the solution is implemented,” ABI long term savings policy chief Rob Yuille said.
While Yuille recognised that the surge in the number of small pension pots needed to be addressed, he said it was crucial the government got the “details right”.
The move comes as part of a wider government push to transform pension systems. Treasury minister Torsten Bell, who formerly headed the think tank Resolution Foundation, is taking charge of reforms as he hopes to make systems more efficient.
Bell said consolidated pots will make the system more “simple” and reduce costs for businesses.
Wider reforms
The reforms are set to be a part of the government’s Pension Schemes Bill, which is set to be introduced before the summer break.
The bill is expected to include vast reforms to the pension system at large.
Among the DWP and Treasury’s plans is a new form of regulation that would enable the proliferation of so-called ‘superfunds’, which are otherwise consolidated defined benefit (DB) pension schemes.
These superfunds are able to invest more freely but critics – including the ABI – say they provide fewer security guarantees to employees.
Rachel Vahey, head of public policy at investment platform AJ Bell, questioned whether the reforms to small pension pots are necessary given government plans to expand superfunds.
“Torsten Bell has made it clear that this is the start of the pension consolidation journey, and that the government has other pension workstreams in place to consolidate pension plans – including the creation of pension ‘megafunds’,” Vahey said.
“On this basis, we should be asking if an automatic consolidator is really needed and, given these other plans, whether this is the best use of government and pension provider – and ultimately pension saver – money.”
She also suggested the government should be clearer about its sweeping reforms.
“We need an overall strategy and clearer view on the sequencing of government plans – how they fit together and what they mean for workplace pension savers.”
DWP and Treasury ministers are also believed to be drawing up plans to revise the Mansion House Compact, an agreement first made in 2023 to get major pension funds to invest cash in unlisted assets.
Chancellor Rachel Reeves hopes more cash can be invested in British assets after the second iteration of the Mansion House Compact is published, according to a recent report in the Daily Telegraph.
Peel Hunt have called on the government to make funds invest more cash at a faster pace.