CashNews.co
As the chancellor Rachel Reeves gears up to give her first Mansion House speech, the pension industry is readying itself for sweeping changes. Under Reeves’ plans we will see the 86 authorities managing local government pension schemes pooling their assets into a smaller number of “megafunds.”
We will also see major consolidation within the defined contribution market — where retirement outcomes are based on how much is contributed over the course of the member’s career and how their investments perform.
The idea behind these changes is that the UK market is currently very fragmented with a large number of small schemes, and this has led to concerns that members may not be getting the best possible outcomes at retirement.
By consolidating into a smaller number of much larger schemes it is thought that schemes can drive efficiencies, push down costs and improve the service on offer to members.
It will also enable schemes to invest in asset classes such as infrastructure which they may not have had the scale to do before. The government’s rationale is that investment in such areas has the potential to boost investment returns which in turn will increase the pensions members receive.
Read more: The pensions and inheritance changes that could impact your retirement
In addition, these investments will also help drive much needed growth in the UK economy.
It’s an approach that has worked internationally. Markets like Canada and Australia operate a model where there are a smaller number of very large pension schemes, and they are major investors in areas such as infrastructure including within the UK.
There have been discussions for years about how to bring about consolidation within the UK market, so schemes have similar scale. However, these discussions have been given added impetus by the new government’s desire to drive growth in the UK economy.
There are of course challenges. Improved investment returns are dependent on there being a sufficient pipeline of high-quality projects to invest in. If there aren’t there are concerns that schemes will be forced to take more risk which could impact returns. It’s also fair to say that investing in smaller companies may bring stellar growth but we also see many fall by the wayside.
The drive to improve standards and value within the UK pension market is a good thing but investment is just one part of the puzzle. Driving member engagement is key — the better informed people are about their pensions then the more able they are to take decisions that will boost their retirement incomes.