‘I’m an investment expert – here’s what I think about Labour’s pension review’

New Chancellor Rachel Reeves has announced a “landmark” pensions review as part of the new Government’s mission to “boost growth and make every part of Britain better off”.

Under plans unveiled by Ms Reeves, “billions of pounds” of investment could be unlocked in the UK economy from defined contribution schemes alone, while pension pots for savers in defined contribution schemes could be boosted by over £11,000.

While the initiative has gained positive traction from the pensions market with many “welcoming” the steps, but would come with new “risks”, an expert has said.

Sharing his thoughts on the plans, Adrian Lowery, financial analyst at wealth management firm Evelyn Partners, said: “There are several things going on here. One is the new Government trying to co-opt private and institutional funds into its drive for economic growth by diverting assets into more productive investments.

“Another is an effort to improve retirement outcomes for savers. And then somewhere in the middle is the idea that consolidation of small pension schemes will assist in both aims, by lowering costs and increasing efficiencies.”

Defined Contribution (DC) pension plans

Mr Lowery noted that the plans to divert DC pension savers’ funds into “higher growth investments” seem to go a step further than Jeremy Hunt‘s Mansion House Compact.

This involved a voluntary commitment by some of the largest U.K. workplace schemers to allocate at least five percent to unquoted, UK growth companies by 2030.

Under the new shift in investments in defined contribution schemes, the Government estimates it could deliver £8billion of new productive investment into the UK economy.

Mr Lowery said: “DC pension schemes usually present a choice of fund options to members and in the end, it’s up to the saver where they put their money. There is a lot of inertia in this area and if pension schemes alter the asset make-up of their main default and target date funds – which savers are usually funnelled straight into – then that will probably go some way to achieving the reallocation of savings.”

However, he warned: “It’s a risky business though, as the authorities would have to be fairly sure that the switch in investments will in fact lead to better performance.”

Pension pot consolidation plans

With pension consolidation, Mr Lowery urged: “Let’s not confuse schemes and individual pots.

“The amalgamation of small workplace DC schemes to deliver cost and efficiency savings is a different thing to individual savers’ small pots being consolidated.”

He explained: “Savers can have small pots within large DC schemes or a large pot in a small DC scheme. If small schemes are encouraged to consolidate, are we talking about a ‘top-down’ consolidation of the pots held within those schemes, up to a certain size? That would have to be handled carefully as savers might feel they are losing control over their pension savings.”

“Consolidating small schemes might well enhance workplace pensions by lowering fees and improving investment choice and clarity of options, so that would be welcome.”

However, he noted: “But helping savers to consolidate the plethora of small deferred pension pots that many accumulate, that is really separate issue.”

The pension savings boost

Mr Lowery noted the estimate that all of these changes will boost individuals’ pensions by £11,000 could be seen as a “finger in the air” at best. This is because the figure would depend on a “wide range of assumptions and contingencies”.

Mr Lowery noted that extending auto-enrolment, by lowering the qualifying age to 18 and removing the lower-earning limit, would have a “definite impact” on pension savings and retirement outcomes.

This recommendation, made in a cross-party review, has not yet been included in the new government’s pension proposals. Additionally, he suggested raising the minimum auto-enrolment contribution rate would be a further beneficial step.

Mr Lowery said: “Employers might resist attempts to raise their minimum contribution, and many smaller firms would not welcome it – but it might not be so difficult to sell a higher minimum personal contribution to the public.

“First, AE has been largely a success and its introduction did not meet widespread resistance among the public.

“Second, new data suggests the UK might have adopted the savings habit after the pandemic turned many households, temporarily at least, into big savers.”

New data from the ONS shows pension saving has remained fairly consistent since the pandemic, which Mr Lowery says could suggest many households “have some leeway” in their monthly budgets, as incomes have grown and inflation has fallen.

He continued: “Who knows, perhaps the experience of accumulating money in the bank during the pandemic has reminded many people of the security and satisfaction that a good buffer of savings provides?

“If so then for many households the next step will be to assess whether some of those savings are best diverted into pensions, where contributions will be boosted by tax relief.”