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What new reforms mean for your pension

Pensions: Saving money investment for future
The government announced an agreement between nine of Britain’s largest pension providers to boost their investment in growth companies. Photo: PA/Alamy (Iuliia Zavalishina)

The UK has the largest pension market in Europe, worth over £2.5tn. This week, the government announced an agreement between nine of Britain’s largest pension providers to boost their investment in growth companies.

After delivering a much-anticipated speech at the Mansion House banquet on Monday, chancellor Jeremy Hunt outlined reforms to boost pensions and increase investment in British businesses.

It comes as MP Laura Trott, who serves as parliamentary under-secretary of State at the Department for Work and Pensions, also made a keynote address on Tuesday, highlighting the ways that the pensions industry can play a role in delivering the plan set out by the finance minister.

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Under the plans, companies such as Aviva (AV.L) Legal & General (LGEN.L), and M&G (MNG.L) have joined a new “compact”, which commits them to allocating 5% of assets in their default funds to unlisted stocks by 2030.

The move, which was also signed by Aegon (AEG), Mercers, Nest, Phoenix (PHNX.L), Scottish Widows, and Smart Pensions, could unlock £50bn if all UK Defined Contribution pension schemes follow suit.

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Hunt said on Monday: “We will deliver not just more competitive financial services but a more innovative economy.”

He added that the agreement is set to “boost returns and improve outcomes for pension fund holders whilst increasing funding liquidity for high-growth companies”.

But what could this mean for your pension?

What is changing?

In a nutshell, UK pension funds are being encouraged to put more of their money into private companies, in a move that could accelerate plans to create the next Silicon Valley.

Currently, approximately one percentage point of pension funds' money goes into private, unlisted funds with the rest being invested in places like government bonds.

The government will create new investment vehicles that will give future retirees a stake in homegrown private companies and startups after a number of high-profile firms chose to list the US.

Comparable Australian schemes invest ten times more in private markets than UK schemes, reaping the rewards that UK savers are missing out on.

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David Postings, chief executive of UK Finance, said: “We welcome the plans announced by the chancellor in his Mansion House speech, alongside his ongoing commitment to ensuring the UK has a strong and globally competitive financial services sector.

“These reforms will help support economic growth and bolster our capital markets by delivering more investment and making it easier for companies to grow and list here in the UK.”

Returns

According to the government, people who have their money in UK pensions could see an increase of about £1,000 on average by the time they retire.

“British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a year for typical earners over the course of their career,” Hunt said.

“This also means more investment in our most promising companies, driving growth in the UK.”

Pension schemes which are not achieving the best possible outcome for their members will be wound up into larger, better performing schemes.

Analysis shows that over a five-year period there can be as much as 46% difference between the best and worst performing pension schemes. This means that a saver with a pot of £10,000 could have notionally lost £5,000 over a five-year period from being in a lowest performing scheme.

More effective investments by defined contribution pension schemes will also increase savers’ pension pots by up to 12%, or as much as £16,000 for an average earner.

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It comes as the UK’s auto-enrolment programme has made workplace pension contributions compulsory for most employees. It has helped Britain become the largest pensions market in Europe with savings of £115bn in 2021 alone.

Chris Cummings, chief executive of the Investment Association, said: “With the right regulatory framework, pension schemes will be able to invest productively and sustainably, unlocking further investment for innovative growth companies, and improving returns for savers by broadening investment options.

“In tandem with reforms to the listings regime, this will help the UK to become a more globally attractive place for companies to list, invest and do business.”

Access

“The changes will help increase investment returns for pension savers through improved access to all asset classes including in high growth sectors, and ensure the UK’s most innovative companies are better supported by UK capital to stay in this country as they scale to maturity,” Sir Jon Symonds CBE, GSK chairman, said.

There have also been calls for schemes to offer decumulation services sooner rather than waiting on legislation which may take some time.

Read more: FTSE higher as UK wage growth piles pressure on Bank of England

“We strongly believe that all pension savers, regardless of the type of pension scheme they save in, should expect to receive a level of help and support from their pension scheme when they wish to access their pension, Kate Smith, head of pensions at Aegon UK, said.

“For too long this hasn’t been the case for members of some trust-based schemes. We therefore welcome the government’s proposed decumulation framework. This will put a duty on trustees to offer decumulation services in-house or to partner with a suitable provider. Legislation will be needed to make this happen, and this may be some time off possibly after the next UK election."

Watch: How to save money on a low income

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