Amid all the jargon of the latest announcement on pensions, one number will have leapt out: the claim that the average worker will gain £6,000 in their retirement fund as a result.
The figure comes from the government’s final report of itsPensionsInvestment Review published on Thursday. It lays out plans to shake up defined contribution pensions, the funds that invest workers’ regular payments in stocks, shares and other assets to grow the money. These provide workers with an income on retirement based on the value of their stake; the size of this income will depend on how much they have paid in and how well the investments have performed.
Probably not. That figure is based on a specific set of assumptions, but it’s not necessarily bad news. The report says “it is important to recognise the actual benefits will differ for all savers and may be higher or lower”.
The £6,000 is based on the pension savings of a man on the median annual salary – currently £37,382 – who works from age 22 to age 68 and pays into his fund throughout that time. His contributions are based on the minimum an employee must pay when auto-enrolled into a pension (4% of his earnings, matched with 3% from his employer and 1% in tax relief).
The government says that after charges and investment growth, the man’s fund would currently be worth £163,600 when he reaches retirement. It says changesto consolidate smaller schemes into pension megafundswould reduce charges and add £2,500 to his pot, while encouraging providers to invest in a wider range of assets could add £3,300. In total that would be £5,900 more to spend in retirement.
In reality, the benefit would depend on how much charges actually fall by as a result of the new megafunds, how much the assets increased in value, and how much the person had in their pension.
Women stand to gain less on average because they typically earn less – median earnings are £31,672 – and they are more likely to take career breaks and miss contributions.
As the name suggests, megafunds are big schemes that will look after billions of pounds of workers’ cash. Currently, there are no rules regarding the minimum sums that providers can manage. The government is concerned that this leads to lots of small schemes that may not have economies of scale, meaning higher charges for their members and potentially poorer investment outcomes compared with bigger schemes.
It said on Thursday it plans to tackle this by bringing in a law that providers must have at least £25bn in invested assets by 2030, although there will be transition rules in place until 2035. The new rules will mean smaller schemes have to join forces.
For an individual saving into a defined contribution pension either privately or via their employer, there may be changes in who administrates their savings scheme and – if the plans work – their charges should go down.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says that scale is important in delivering better outcomes for savers, but that “must not come at the cost of reducing competition, member choice and much needed innovation”.
She adds: “If the market is to thrive, then there needs to be space for smaller, innovative providers. It’s a lesson learned in the retail banking market, where competition from smaller, challenger banks has put pressure on larger incumbents to improve user experience and product offerings.”
At the moment, although there are many other assets that they can buy, pension schemes’ holdings are dominated by publicly listed global shares and bonds, because they are easy to trade. The government says that by making funds bigger it will make it easier for them to invest in a wider range of things, including private markets – these include infrastructure, property and loans to start-ups. These take longer to generate returns, even though the yields may eventually be higher.
The government wants some of this money to be invested in the UK – and although lots ofbig providers have already committed todoing this – it says it will bring in a “reserve power”, which will let it set targets for private investments.
Tom Selby, director of public policy at the advice firm AJ Bell, says the power “essentially puts a gun to schemes’ heads and will create those mandatory targets in all but name”.
He adds: “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. It is vital the needs of pension scheme members remain the priority.”
Selby is sceptical about the reforms. “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 says.
“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.”
However, Jonathan Lipkin, director of policy, strategy and innovation at the Investment Association, says the plans mark “the beginning of a new era for the UK pension system”.
He adds: “With the greater resources available to larger pension schemes, investment expertise and governance can be strengthened to achieve sophisticated scale. This will give pension savers access to a wide range of asset classes and strategies that can both improve member outcomes and contribute to better capital allocation, including for the UK economy.”