Millions of pension savers could see changes to where and how their retirement money is invested, as the Chancellor prepares to unveil a major shake-up of the UK’s pension landscape in her Mansion House speech next week.
Rachel Reeves is expected to double down on efforts to channel more of the country’s £2.5trn in retirement savings into UK businesses and infrastructure.
The move is designed to boost economic growth, encourage higher investment returns, and tackle Britain’s looming pensions crisis.
But while Labour argues that reform is essential to modernise the system, experts are warning that the plans could pile pressure on employers and increase risk for savers.
At the heart of the current reforms is the Mansion House Accord, a deal struck earlier this year between the Government and 17 of the UK’s largest workplace pension providers.
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Under the agreement, these providers have pledged to allocate at least 10 per cent of their default defined contribution (DC) funds into so-called “private markets”, which would mean investing in things like unlisted firms and green infrastructure. At least half of that investment will go into UK assets.
The Government claims this will unlock tens of billions of pounds to support British businesses and deliver stronger returns for pension savers.
While Labour says investing in private markets could boost long-term returns, others say private assets can be harder to value, costlier to manage, and less liquid than shares on the stock market.
Lisa Picardo, chief business officer at PensionBee, warned that “private markets are by no means a guaranteed route to better returns” and often come with “higher and more opaque costs”.
Crucially, the changes currently only apply to default workplace pension funds, which are the ones employees are automatically enrolled into if they don’t actively choose another option.
Personal pensions, including SIPPs (self-invested personal pensions), are unaffected. In 2023, 80 per cent of all employees were participating in a workplace pension.
What could be announced?
Reeves is expected to go further in her speech, building on the Accord to deliver further reform through the upcoming Pensions Schemes Bill.
A key plank of the plan is consolidation – merging smaller pension schemes into “superfunds”. This, she believes, will allow pension funds to invest more efficiently in larger, longer-term UK projects.
The push for scale is not without risk, though. Rachel Vahey, head of public policy at AJ Bell, warned that savers could get lost in the rush to create investment giants.
Another likely announcement is a long-awaited pensions adequacy review, to assess whether people are saving enough for retirement.
Many in the industry believe the current 8 per cent minimum auto-enrolment contribution is too low, especially with life expectancy rising and reliance on the state pension increasing.
But employers, particularly small businesses, could feel the strain if they have to pay more towards pensions.
Jon Greer, head of retirement policy at Quilter, said: “If the outcome is a push for higher contributions, it will have financial implications.”
Already facing increased national insurance costs after Reeves upped employer contributions earlier this year, a mandate to boost pension contributions could be the nail in the coffin for some, according to business groups.
There’s also speculation that Reeves could open the door to accessing defined benefit (DB) pension surpluses, which are pots of money that exceed what’s needed to meet guaranteed pension promises.
While this could free up cash for businesses or investment, experts urge caution.“These funds are not spare capital. They belong to workers and should be treated with care,” said Ms Picardo.
What it all means for your pension
If you’re in a default workplace pension scheme, which millions are, your money may increasingly be directed into private UK investments in the coming years.
That might eventually mean higher returns, but also more exposure to less transparent and potentially riskier assets.
Importantly, savers still have a choice. As Mr Hollands noted, many schemes allow members to switch out of the default fund if they prefer more conventional or lower-risk investments.
He said: “If you have consolidated your legacy workplace pensions into a SIPP, there will be no impact.”
For the self-employed, gig economy workers, and low earners, the system remains patchy.
Ms Picardo added: “The current system does not reflect the realities of modern work, doesn’t cast the safety net wide enough, and does not sufficiently encourage everyone to build personal savings to reduce reliance on the state pension.
“Millions of people earning below the threshold, working multiple jobs, or operating as self-employed are not saving enough or at all for their future, not because they do not want to, but because the system is not designed for them.”
Experts encourage people to take professional advice to help plan their future.
Catherine Foot, director at the Standard Life Centre for the Future of Retirement, warned that without immediate change, the UK faces a serious savings shortfall.
She said: “By 2040, the majority of DC savers will enter retirement with savings below the level they expect or need.”
The Government has been contacted for comment.
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