Pension savers have been urged to review their options as Government-backed reforms set out to increase the average retiree’s private pension payouts by £1,000 a year.
Chancellor Jeremy Hunt has backed an agreement between nine of the UK’s biggest defined contribution (DC) pension providers.
The group has committed to allocating five percent of their assets in default funds to unlisted equities by 2030.
Mr Hunt also announced in his Mansion House Reforms there will be a new Value for Money Framework, to ensure investment decisions are based on long-term returns and not simply costs.
This could also mean pension schemes which are not performing could be wound up into larger schemes which are doing better.
He said: “The inevitable outcome of these announcements is that any trustees or employers involved in occupational DC schemes face more work ahead to either demonstrate they are meeting the new requirements or consolidating with a master trust.
“There is no doubt that these latest reforms will accelerate consolidation and we suggest that trustees and sponsoring employers waste no time in reviewing their options together to agree their preferred future direction on their own terms.”
He also said pension fund schemes are taking a more “holistic approach” to financial wellbeing in the workplace rather than just focusing on retirement planning, as they are more commonly overseen by HR and reward teams than specialist pension managers.
The Government said the reforms could unlock some £50billion in investments in high growth companies if all DC providers took up the pledge.
Phil Brown is director of policy at People’s Partnership, the provider of The People’s Pension.
He said he supports a wider range of investment options for pensions as long as they are made “in the savers’ interests and at a fair cost”.
He said: “It’s now vital that the asset management sector brings forward quality, affordable investment options that work in the best interests of consumers.
“The vast majority of people automatically enrolled onto a workplace pension scheme are invested into default schemes, which are designed to serve time-pressed consumers, who put faith in the trustees of their pension provider to make the right decision on their behalf.
“Research has shown that such funds offer much better returns over the long term than DIY investment strategies.”
Nicholas Hamilton, director of Financial Planning at Mazars, said it’s important pension savers understand the reforms may not apply to all their pensions.
He said: “This particular reform is aimed at the default investment fund for pension schemes and therefore will not apply to all investment options available through a personal or workplace pension.
“For example, one of the signatories, M&G, is providing access to private markets through the Prudential With-Profits Fund.
“If savers are therefore wanting to take advantage of these reforms, it is important they review the investment holdings within their pensions.”
He said his advisers are often asked how best to invest DC pensions to get the best return, but this varies depending on the individual’s attitude to risk and the timeframe for the investment.
He explained: “Having a higher proportion of your pension invested in equities will provide the opportunity for higher returns in the longer-term, although this will also mean the pension may fluctuate in value to a greater extent in the shorter-term and therefore may not be appropriate for all individuals, particularly those close to retirement and/or who have few other savings to support them once they stop working.
“It is therefore important that savers consider their personal position and needs when making decisions about the investment of their pension benefits and if they don’t feel comfortable making those decisions themselves, to seek advice from a financial planner to support them.”
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