Savers urged to engage with workplace pensions as Bill paves way for private assets

The Pension Schemes Bill is heading for Royal Assent and passage into law, bringing forward major reforms to the UK pensions landscape after the House of Lords accepted amendments.  

The Bill includes a watered-down version of mandation that requires the Government to publish a report before using the powers to dictate asset allocation decisions to pension schemes.  

Jason Hollands, managing director at Bestinvest, the online investment platform, SIPP and ISA provider, and coaching service, comments: 

‘This might seem like an abstract and far-off issue to most workplace pension savers, but we would advise that they take good note of the implications.

‘On the face of it, the Bill paves the way for larger defined contribution “mega-funds”, which the Government hopes will improve scale, help bear down on workplace pension costs and enable greater access to less liquid assets such as infrastructure, private equity and private credit.

‘However, its passage has been overshadowed by contentious Government proposals to retain reserve powers to mandate investment allocations. After rounds of parliamentary “ping pong” between the Commons and the Lords, the final Bill includes watered-down powers with statutory guardrails. Even so, many industry observers remain uncomfortable in principle with the idea of Government being able to direct pension schemes’ asset allocation decisions.

'Governments will for a while at least have a backstop right to impose investment strategy, albeit partially, on pension trustees, whose overriding duty is to run schemes in the best interest of their members. However, the nature or extent of mandatory powers is in some ways a bit of a red herring, as the big master trusts that provide the majority of the defined contribution workplace pensions for the UK’s employees have in any case already agreed to increase investment in private markets.

‘Under the Mansion House Accord, signatories have voluntarily agreed to, by 2030, invest at least 10% of their main DC default funds in private markets by 2030, with at least 5% of the total allocated to UK private markets. The Government believes this could support both higher long-term returns for savers and increased investment in the UK economy. For many schemes, a 5% allocation to UK private markets may be higher than their exposure to the UK listed equity market, which has seen a shrinking number of constituents and a relative dearth of IPOs. 

‘Some pension savers will be relaxed about this, seeing it as a route to improved diversification and potentially enhanced long-term returns. Most will be unaware of, or uninterested in, the nuts and bolts of how their pension is invested. Some, however, may feel uncomfortable about part of their pension – which they have spent years saving their hard-earned wages into - being invested in less liquid assets, which they possibly don’t really understand. They might also feel that 2030 is a long way off, but the master trusts could adopt the agreed strategy well before then, and some may even go higher than 10%.

‘Importantly, sceptics can take action.

‘Workplace savers should understand that the Mansion House Accord commitments relate specifically to default funds – these are the ones you will automatically be allocated into when you begin contributing to the workplace pension, unless you choose otherwise. One size does not fit all and therefore most workplace pensions offer a choice of funds, so savers who want a different approach from the default fund have the option of reviewing the alternative options available within their scheme.

‘And don’t forget legacy pensions. 

‘As people change jobs, they typically build up a variety of pension pots along the way that can sometimes be forgotten about. It is worth checking where these are invested and the approach and whether the funds held fit your objectives and risk appetite. Some savers might consider consolidating legacy pots into a Self-Invested Personal Pension, where they can have much greater freedom over where their pension is invested and the convenience of bringing together their retirement savings into a single place. Many SIPPs, including Bestinvest’s, offer access to thousands of funds from different providers, as well as ready-made portfolios for those who would prefer a managed option.

‘Before moving any pension, however, it is important to first of all check that you will not incur exit penalties or lose valuable benefits, such as guaranteed annuity rates.’