Big private pension shake-up: what expected reforms mean for you

New pension rules should make it easier to compare fees and service between provider. Alice Guy unpacks what these seemingly techy changes could mean for pension investors.

Yesterday, the government launched arguably the biggest pensions shake-up since 2015 pension freedoms day.

The proposals include plans to make comparing pension providers easier, giving clarity on fees, charges and investment performance. The new rules are aimed at creating “fairer, more predictable, and better-run pensions” so that pension savers can build their wealth and “achieve the best possible retirement”.

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The government also wants to improve the situation for millions of workers with multiple small pension pots. The Department for Work and Pensions (DWP) is looking at how to make pension consolidation easier when people move jobs.

Pensions minister Laura Trott said: “There is a pension inequality gap between those who had secure retirements thanks to DB [defined benefit], to much more uncertainty now. Since 2012, automatic enrolment has transformed the pensions landscape in the UK for the better, but we know there’s more to be done to ensure a fairer future for savers.”

Need for reform

The private pensions system in the UK is arguably one of the best in the world, with generous pension tax relief and amazing flexibility for pension savers.

Pension auto-enrolment, requiring all employers to offer a workplace pension, has been a fantastic success since it was introduced in 2012. The total annual workplace pension contributions of eligible employees have increased in real terms from £41.5 billion in 2012 to £62.3 billion in 2021.

The number of pension savers has also doubled among young people aged 22 to 29 since 2012. In 2021, UK workers saved £115 billion into their pensions, a £32.9 billion increase in real terms compared to 2012, when automatic enrolment was introduced.

In 2015, George Osborne’s pension freedoms further enhanced the UK system. Flexi-access rules, offered pension savers more choice about how to access their pension pot. Before the reforms, most people had had to buy an annuity, but after the changes people could decide how much to withdraw from their pension pot once they reached 55, rising to 57 in 2028.

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But critics argue that, despite the success of auto-enrolment, pensions are still confusing for consumers. Pension charges and fees are often obscure, making it difficult to compare pension providers. Many workers have also lost pension pots, with multiple small pots spread across different providers.

New proposals

Yesterday, the DWP announced several new consultations aimed at further improving the UK private pension system.

Value for money

The new rules would set out a “value for money framework” for providers so that fees and costs are displayed consistently across different pension providers. It would make it easier for investors to see if they’re getting a good deal, or if they might be better off elsewhere.

At the moment, it’s very hard for pension savers to work out if they’re getting good value for money. Pension fees and charges are often hidden in the small print and many people don’t know what they’re paying. The government wants pension schemes to disclose their investment performance, costs and charges, and quality of service in a way that’s clear and comparable between providers.

The new rules would require providers to “disclose key metrics and service standards shifting focus from a dominant consideration of costs only, to enable a holistic assessment of value for money”.

Small pots

The government is also consulting on the issue of “small pots” as many pension savers have multiple small pension pots spread across many providers.

They are looking at rules to automatically transfer pensions to a new provider when an employee moves job and changes pension scheme. Or another alternative being considered is an automatic system where every deferred pot goes off to a third-party consolidator.

Pension dashboards

The new rules will be on top of existing pension plans to introduce pension dashboards during 2023 and 2024.

The new pension dashboards will allow pension savers to see all their pensions from different providers in one place. It will help them keep track of their pensions and make it easier to make decisions on whether to transfer or consolidate pensions.

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Personal pensions and large occupational schemes will have to connect to a dashboard by summer 2023, and then we expect dashboards to go live in 2024. But we’re still waiting on two consultations, due to report in February 2023, on how the pension dashboards will be enforced and regulated.

Ben Cocks, director at Altus Business Systems, says: “I don’t think the pensions dashboard is the utopia that some people seem to be claiming.” He points out that the dashboards by themselves won’t solve the problem of people having small pots or encourage people to save more.

Ultimately, Cocks says, a dashboard will form “one quite small cog in quite a big machine”, alongside other initiatives such as the DWP online tracing service, improving the paper-based transfer system, and developing better services from technology providers.

However, Lydia Fearn, from pension consultant Redington, believes pension dashboards are essential in combating disillusion with the pension system so that savers don’t just give up and “look elsewhere” – particularly to areas where they feel more in control, like ISAs and property.