One year into Labour’s Government, Rachel Reeves is pressing ahead with a major overhaul of the UK’s pension system.
The plan is designed to unlock billions for investment in UK firms by nudging retirement funds into backing British businesses, infrastructure and start-ups.
But as the Treasury prepares powers to enforce these shifts, some fear pensions could become a tool of economic policy rather than a vehicle for long-term security.
In May, 17 of the country’s largest workplace pension providers expressed their intent to invest at least 10 per cent of their defined contribution (DC) default funds in private markets by 2030, with 5 per cent of the total allocated to the UK.
But the boss of Lloyds Banking Group likened forcing pension funds to invest in UK assets to “capital controls”, arguing that tackling the housing crisis and improving Britons’ financial resilience would be a better way to grow the economy.
Charlie Nunn said mandation would put funds “in conflict” with their fiduciary legal obligations to find the best returns for pensioners.
The i Paper spoke to leading experts about what pension savers can do now to protect their retirement nest eggs.
Now is a good time to take stock of where your money is being held, Craig Rickman, personal finance editor of interactive investor (ii), said.
If you are concerned about where your retirement savings are being invested, for example, if they are heavily in UK start-ups, there are ways to avoid this.
Mr Rickman said: “You may need to take some action if you want to do this. Examine the investments in your current workplace pension, and any previous ones too, and play more of an active role in your pension strategy.”
He pointed out that the Mansion House Accord, which is the voluntary agreement the 17 pension providers backed, only applies to default workplace pension funds.
This means your savings may already be targeted for higher-risk private markets unless you have actively chosen a different option.
Should you want to change this, you can do so by speaking to your provider.
Do not assume the default fund suits your needs
Default funds – a type of fund that members are invested in if they do not choose a fund when they join their scheme – are meant to offer a “one-size-fits-all” approach. But Mr Rickman warned this may not be right for everyone.
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He said: “When it comes to investing for retirement, there is no universal approach, so your scheme’s default fund might not be the most suitable strategy for you.
“For instance, regardless of pension schemes’ pledge to invest more in private assets, investors with plenty of time on their side and/or a more adventurous risk appetite could find that the default fund is too cautious, stymying potential returns and harming their eventual retirement pot.”
The Government have said it is up to pension providers whether or not they want to change their asset allocation – where pots are invested.
However, they added that in the future, if they feel it is necessary, they could force providers to invest more in the UK – something some experts are concerned about.
Jason Hollands, managing director of Evelyn Partners, said: “The threat of mandated weightings undoubtedly loomed large over pension funds when they ‘voluntarily’ agreed to allocate 10 per cent of their default funds into private market assets, including at least 5 per cent into UK private market assets, by 2030, under the auspices of the Mansion House Accord.
“Pension scheme trustees have a duty to deliver the best returns for an appropriate level of risk for scheme members, not to back the Government of the day’s economic priorities.”
People can choose their own investments to meet their risk preferences and long-term plans – something plenty of auto-enrolment providers offer.
Mr Rickman said: “The good news is that you don’t have to settle for the default fund.
“It’s worth taking the time to ask your scheme about any alternative investment options and switching both your existing savings and future contributions into something else that’s more appropriate.”
However, Tom Selby, director of public policy at AJ Bell, noted that it’s not yet clear “whether these providers will choose to increase UK allocations in the defaults alone or across a range of their funds”.
Review and consolidate older pensions
It is not just your current workplace pension that could be affected.
For any previous workplace schemes that might be in default funds, Mr Rickman advised people to dig out the paperwork or log in to their online accounts to find out what they are invested in, and either switch investments or consider transferring to a different plan.
Consolidating into a self-invested personal pension (SIPP) could be a smart move, he said.
“Merging two or more plans into something like a SIPP can bring several benefits.
“You have a wide choice of investment options, and it can also make things much easier to manage and monitor. You might also reduce your costs.
“Just make sure your existing plans don’t have any valuable guarantees that would be lost on transfer; taking professional advice is necessary.”
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