The Government is pressing on with major changes to pensions policy that will open up more investments and could increase payouts by over £1,000 a year.
The proposed changes will affect defined contribution (DC), defined benefit (DB) and collective defined contribution (CDC) schemes, with hopes pension funds will be invested more in growing sectors.
Chancellor Jeremy Hunt set out a series of policies in his Mansion House speech and the autumn statement provided more details on how the reforms will work.
Defined contribution schemes and the Pension Protection Fund
The Pension Protection Fund (PPF) previously put forward plans to become a public sector consolidator, taking on DB pension schemes that commercial providers no longer want to administer.
The fund would increase the schemes’ investments in ‘productive finance’ assets such as private equity and infrastructure, to increase payouts for members.
This would be separate from its current function, taking on and managing DB schemes where a company has become insolvent and its scheme is underfunded.
The Government has said it will work with the pensions industry to create a public sector consolidator by 2026 – and the PPF has the experience to take on this role.
Ministers are also to run a consultation on changing PPF rules so all members receive their full pension payouts. At present, members of insolvent companies who are taken on by the PPF and who have not reached pension age, only get 90 percent of their payouts when they start to draw down.
The Government said an initial consultation about guaranteeing full payouts received “mixed views…with some support for opt-in higher benefit guarantees but some concerns raised”.
Ministers are also lookin at changing the rules around when surpluses can be repaid for DC schemes, to encourage well-funded schemes to invest in assets with higher returns.
The authorised surplus repayment charge will be reduced from 35 percent to 25 percent from April 6, 2024.
‘Pot for life’ pensions
As set out in the Chancellor’s speech, the proposed ‘pot for life’ would give pension savers the legal right to require a new employer to pay their contributions into an existing pension pot, should they choose this.
The Government has issued a new call for evidence to ask for providers’ views on whether a lifetime provider model would improve payouts for members and how the CDC market can grow.
The Government said in an update after the autumn statement: “The Government’s intended direction is towards a DC market with a smaller number of schemes, a subset of which act as authorised default consolidators of eligible deferred small pots.”
Local Government Pension Scheme (LGPS) investment
The Government has confirmed the LGPS guidance will be updated to require a 10 percent allocation for investments in private equity.
This will not mandate investment as administering authorities would be under the same requirement as currently to act in the interests of their members.
Ministers have set a March 2025 deadline for the accelerated consolidation of LGPS assets into pools. The Government want to decrease the number of pools, with each one having at least £50billion in assets.
The size of these pools will continue to increase with all LGPS funds to be invested in pools of £200billion or more by 2040.
The scheme’s assets are projected to grow to around £500billion by 2030 and then to £950billion by 2040.
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