Measures contained in the new Pension Schemes Bill are estimated to boost the value of an average earner’s DC pension by £11,000 — according to government figures.
The Pension Schemes Bill was announced in yesterday’s King’s Speech. Supporting details published by the government say that the range of measures contained in this Bill will support over 15 million people in private-sector pension schemes.
The Government estimated that two key measures: establishing a value for money ‘test’, and automatic consolidation of deferred small pots will result in an 9 per cent uplift in the value of pension pots at retirement for an average earner. Other key measures (see below) include a requirement for occupational schemes to offer retirement income products.
The government specifically notes that the various measures in this Bill will drive further consolidation in the sector, which will encourage more investment into productive finance, helping to support the UK economy.
It also points out that these measures, particularly around the value for money framework, will tackle the issue of underperforming pension schemes. It says there is currently a significant variation in performance across pension providers. The government adds that this issue will get worse if not tackled, particularly as individuals typically do not choose their pension provider, with most saving through their employer-chosen scheme.
In its accompanying notes the government notes that over a five-year period, a defined contribution pot of £10,000 (with no further contributions) invested into the lowest performing scheme would be worth £10,400, whereas invested in the highest performing scheme it would be worth £15,100 – 46 per cent higher.
The bill proposes a range of measures, most of which were already proposed by the previous Conservative administration. These include:
- Consolidation of smaller deferred DC pots: the government is proposing automatically bring these together in one place to maximise income in retirement
- Developing proposed Value for Money framework. This will include a stantdased test that trust-based DC schemes will need to meet to demonstrate they deliver value. The government has said that the FCA will ensure this is also applied to contract-based schemes. This measure is likely to further encourage consolidation in the market, leading to fewer larger schemes. In its briefing notes the government links this measure to its plans to encourage pension scheme to invest in more productive investment funds.
- New retirement income product: The bill will place new duties on trustees of occupational pensions schemes to offer a retirement income solution or range of solutions, including a default option to member. The bill also says this will lead to funds being invested for longer, again giving the potential for investments in Prout assets, so boosting UK economic growth.
- Further consolidation of DB scheme through superfunds.
The bills also reaffirms the pensions ombudsman as a competent court removing the need for pension scheme to apply to the court to enforce decision in relation to its decision on the recovery of overpayments.