The Pension Schemes Bill now making its way through Parliament will bring the biggest pension reforms since auto-enrolment and pensions freedoms. Its core aim is to achieve higher returns for savers and greater investment in the British economy.

The Bill’s progress follows publication of the final report of the year-long Pensions Investment Review, which identified fragmentation of the pensions market as a major barrier to efficient investment.

Creation of ‘master trusts’

The plan is for multi-employer defined contribution schemes, or ‘master trusts’, to achieve at least £25 billion of assets under management by 2030, a size identified as necessary for greater efficiency, as well as to enable fund managers to draw on greater expertise and diversify investments. Only three of the current 33 master trusts are currently operating at that size. Schemes that think they can reach this target must have a business plan to achieve that scale. Those unlikely to get to that size will have to consolidate and it is envisaged that the number of master trusts will fall to below ten.

Value for money

An important element of the Bill is its value-for-money framework. Money purchase occupational schemes will have to publish more data, such as:

• Performance assessments.
• Quality of service provided to members.
• Classes of assets invested in.
• Investment performance.
• Costs incurred.
• Charges on members or employers.

Trustees or pension scheme managers will have to give a value-for-money rating of ‘fully delivering’, ‘intermediate’ or ‘not delivering’.

Anyone receiving an intermediate or not delivering rating will have to prepare an action plan for improving the scheme’s performance, send it to the Pensions Regulator and inform participating employers of the rating. They will also be prevented from bringing new employers into their scheme. If the Pensions Regulator considers that an under-performing scheme cannot improve sufficiently, the accrued rights of members may have to be transferred to another scheme. Much of the detail will come in regulations after Parliament has passed the Bill.

Improvement assessments

Even where schemes are delivering value for money, the government considers there is still potential for large differences in outcomes. Providers and trustees will be expected to assess whether their savers should be moved into a main scale default arrangement – a scheme that meets the financial and legislative criteria.

The many single-employer schemes are expected to transfer members into the master trusts as they will not want to take on the new burdens of the value for money framework. Very small pension pots – £1,000 or less – will have to be transferred to consolidator schemes.

Defined benefit schemes will have more flexibility to release surpluses, collectively worth £160 billion, to support employers’ investment plans and benefit scheme members.

Reliable pension benefit requirement

Another significant area that the Bill addresses is how members withdraw their benefits on retirement. Trustees or managers will have to make available one or more default pension benefit solutions to provide members with regular income for life. Pensioners will be given a choice and where a scheme does not offer a suitable retirement product members will be able to transfer to a provider that does.

At present if a member reaching retirement wants to go into pension drawdown they have to find that solution themselves and are exposed to the risk of picking a poor product. The default product is likely to be a combination of drawdown first, followed after some years by an annuity.

Alongside the Bill the government has published a roadmap setting out a timeline for implementation of reforms over the next five years. Once this is under way, Phase Two of the Pensions Review will focus on the adequacy of retirement incomes and inequalities within the pensions system. Although automatic enrolment has resulted in most working people saving for their retirement, millions are under-saving.