The latest pension reform: What does it mean for you? 

Just last week, My Pension Expert provided a roundup of what has been an incredibly eventful period in pension policy. However, there is truly never a dull moment in the world of politics as, just last week, further pension reforms were announced by Chancellor Jeremy Hunt. 

The Mansion House Reforms, promise to unlock the £75 billion of additional infrastructure investment via change defined contribution (DC) pensions, in addition to other public sector and defined benefit pensions. 

At My Pension Expert, with our specialism in DC pensions, we want to make sure savers understand exactly what these changes mean for savers with such schemes and ensure Britons understand how their money is being invested. 

Breaking down the jargon

First things first, it is important to understand exactly what has been announced, and how it relates to pension savers. 

Essentially, some of the UK’s leading DC pension providers – such as Aviva, Scottish Widows, and L&G – have all agreed to commit to allocating 5% of assets within default pension funds (i.e. pension funds where investors do not specify where they want their money to be invested) into unlisted equities. This agreement is supported by both The Chancellor and Nicholas Lyons, Lord Mayor of the City of London.

Unlisted companies are private limited companies that are not traded on a listed stock exchange. Investing in these equities would mean that pension providers would be able to explore investment opportunities within areas of potential high growth, such as startups or businesses within the tech sector.

It is important to remember, however, that DC pension providers are still not obligated to make these investments, nor is there an obligation to invest in UK companies. It is a voluntary agreement to explore diversification of asset classes. 

What does this mean for DC savers? 

The Chancellor has highlighted how these reforms could benefit UK businesses which may have otherwise struggled to secure funding. However, he also stressed potential benefits for savers as well. 

There has been widespread concern throughout Westminster that people are not saving enough in their pensions. Whilst auto-enrolment has encouraged tens of millions of people to save into their pension, with £115 billion being saved into such schemes in 2021, the government is worried that the schemes still don’t provide a strong enough opportunity to help people’s money work as hard as possible. 

As such, the Chancellor hopes that a commitment by UK providers to explore unlisted equities could result in more effective investments and consequently increase the size of people’s pots in the long term. It is hoped that the reforms could increase savers’ DC pots by up to 12% – or in monetary terms, up to £16,000 for the average earner. 

Will the reforms make a difference? 

The reforms have been widely accepted by the industry as a positive move to helping people save more effectively for retirement.

That said, it is important to remember that the success of these investments is not guaranteed. As is the case with any investments, whilst they do offer the opportunity for growth, they also expose savers to risk of loss. 

As such, it is impossible to say with complete certainty what returns these reforms could offer.

Further, it is important to acknowledge that the reforms should not be viewed as a “quick-fix” solution to the UK’s pension system. Other issues such as ensuring the delivery of the pension dashboard scheme, improving access to affordable advice, and addressing the pension engagement gap via improved financial literacy all must be addressed, if we are to achieve strong pension outcomes for future generations. 

Ask the question

Of course, for those unsure about the impact of these reforms on their pension, or even just want to discuss different financial options, independent financial advisers, like our team at My Pension Expert are here to help.

Indeed, our team will conduct a comprehensive review of your current circumstances (including financial and health), as well as the lifestyle you want to enjoy in retirement. Our advisers will then review the various investment options, including a variety of default pension funds, and make a tailored recommendation to suit their needs. 

Of course, all funds involving investments carry an element of risk, however, some schemes present more risk than others. And My Pension Expert’s advisers will ensure that this is clearly explained to savers, to ensure they are comfortable with the option they choose. 

There is never a quiet moment in pension policy. However, we are committed to breaking down the jargon, and ensuring all savers understand what it means for them. And remember, our team are always on hand to provide people with the support they need, should they want to better understand different pension options, which could strengthen their financial position, and set them on the path to the retirement they want.