Major UK pension reforms passed

The UK has passed legislation requiring pension schemes to prove they're delivering value for money or face consolidation and enables automatic merging of multiple pension pots.

The Pension Schemes Bill was passed into law on Wednesday, which will kickstart one of the most major reform packages seen in the UK's pension system.

The primary reform is the introduction of a Value for Money framework which will require trustees to offer clear default retirement income options. The aim is to avoid savers being stuck in underperforming schemes. This will involve a standardised approach to how value is assessed, driving competition in the sector.

Automatic consolidation of multiple small pension pots will also be enabled.

It is expected the changes could see the average worker retire with as much as $55,000 more in savings.

Further consolidation is also being sought via a measure that would see the creation of multi-employer defined contribution megafunds to drive greater diversification of investments and provide a more cost-effective option to pension savers.

Local Government Pension Scheme assets would also be pooled and managed by select managers to increase investment in infrastructure, housing and clean energy across the UK.

This will effectively force pension schemes to invest in nation-building projects and UK businesses. However, mandation powers that the original proposed legislation included and would have allowed the government to dictate allocation levels to certain asset classes have been watered down.

While a reserve power to mandate how funds invest remains in the bill, guardrails were put in place to monitor the use of this, including the need for an independent assessment to be made before the power can be enacted.

"Today is a landmark moment for the 22 million workers building up a pension pot across the UK," minister for pensions Torsten Bell said.

"For too long, our pensions system has been fragmented and rarely ensures that people's savings are working hard enough to support them in retirement.

"The Pensions Schemes Act will change that by creating schemes that drive down costs, deliver higher returns, and give savers the security they deserve."

The reforms have been on the table for some time. In September 2020 consultation first began on plans to force smaller workplace pension schemes to justify their existence, and it was expected this pressure to consolidate was going to then be placed on larger but sub-$10 billion funds.