Chancellor Rachel Reeves has announced a huge pension ‘shake-up’ in her first Mansion House speech that will unlock billions of pounds for investment in business and public services.
The creation of pension ‘megafunds’ follows announcements about pensions and the triple-lock in the Autumn Budget last month, when it was confirmed that 12 million pensioners would be handed up to £470 extra next year.
But what will these changes mean for existing pension access? And will they have any impact on savings? Metro spoke to a finance expert to find out everything you need to know.
How will the new pension system work?
Rachel Reeves has based her proposals on systems currently used in Canada and Australia, where money is pooled into a small number of funds which are then used for larger global investments.
The Canadian system currently invests approximately four times more in infrastructure compared to the UK. This means that teachers and professors in Canada are ‘more likely’ to invest in British infrastructure than the average British saver, as pensions minister Emma Reynolds told Sky News.
Reeves met with Canadian pension planners from the Maple Eight in Toronto in August this year, and said that ‘the size of Canadian pensions schemes means they can invest far more in productive assets like vital infrastructure than ours do.’
‘I want British schemes to learn lessons from the Canadian model and fire up the UK economy, which would deliver better returns for savers and unlock billions of pounds of investment.’
As per the Gov UK website, the proposed changes could ‘unlock around £80 billion of investment’ for both infrastructure projects and future businesses. Of this, more than £20 billion will allegedly become available to be invested in ‘local communities.’
Likewise, the Local Government Pension Scheme in England and Wales will oversee assets worth approximately £500 billion by 2030. At present, these are currently split across 86 administrative bodies, spanning £300 million and £30 billion.
‘Rather than 86 councils managing investment pots of between £300 million and £30 billion, the new proposal will see a handful of funds responsible for some £500 billion by 2030,’ Melanie Pizzey, CEO and Founder of the Global Payroll Association tells Metro.
‘It’s hoped that by consolidating pension schemes into a handful of funds, run by professional fund managers, the UK should see billions more invested into areas such as energy infrastructure, tech and public services.’
What did Rachel Reeves announce in her Mansion House speech?
The Chancellor delivered her first Mansion House speech on financial services and focused on pension reform.
The speech was used to address the issue of a fragmented pensions landscape but with the key message of delivering investment and economic growth.
She announced plans for the pension ‘megafunds’ which could result in around £80 billion to invest in businesses and infrastructure.
It marks the biggest pension reform in decades which will merge Local Government Pension Scheme assets and consolidate defined contribution schemes into megafunds.
The reforms will be introduced through a new Pension Schemes Bill next year.
She also pledged to rip up financial red tape arguing that regulatory changes following the 2008 economic crash have ‘gone too far’ and said she also looks forward to working closely with Donald Trump to ‘strengthen our relationship’.
‘But we cannot take the UK’s status as a global financial centre for granted,’ she said.
‘In a highly competitive world we need to earn that status and we need to work to keep it.’
Ms Reeves added: ‘While it was right that successive governments made regulatory changes after the global financial crisis to ensure that regulation kept pace with the global economy of the time, it is important that we learn the lessons of the past.
‘These changes have resulted in a system which sought to eliminate risk-taking. That has gone too far and, in places, it has had unintended consequences which we must now address.’
How will the new pension system impact my savings?
The new pension system will not see monthly payments to pensioners impacted, as these are based on individual salaries and service length.
However, some critics are concerned that the new pension investment system could jeopardise savings.
As Gervais Williams, head of equities at Premier Miton, told the BBC, combining the smaller schemes into larger megafunds would be ‘a mistake.’
‘These megafunds, by implication, they’ll invest in mega-companies and many of the smaller companies will be, unfortunately, less significant in them going forward,’ Gervais added.
And, as Reynolds added, investing in larger pension schemes involves ‘a more diverse range of assets, including private equity, which are higher risk, but over time give a higher return.’
More Trending
However, as Melanie explains, there’s unlikely to be any damage done to our savings – though we won’t know the true impact until the change takes place.
‘The move has been widely criticised for putting politics before the public as taxpayers could be forced to pick up the bill from poorly made, high-risk investments,’ Melanie says.
Here’s what really happens to your pension when you die
In the case of death, the pension pot doesn’t just disappear though, nor does it automatically go to your next of kin.
As such, you need to take action to ensure it goes to the right person.
Speaking on This Morning, Money Saving Expert founder Martin Lewis previously explained that you can’t bequeath the sum to a loved one in your will.
Instead, you have to nominate a trustee to handle your estate, then create a document explaining what you want to happen to your pension – and you might want to do that now, so your contributions aren’t just left in the lurch.
Martin said: ‘Pensions don’t generally go in your will, it is the trustees who will decide who the money goes to.
‘An expression of wishes nomination form tells the trustees who you would like it to go to. It can’t dictate, but it is a very strong indication.
‘My big tip, if you haven’t done that recently, go and make sure it is up to date because you do not want to leave your pension to your ex.’
‘While our individual savings are unlikely to see any major short-term impact, there needs to be some caution when it comes to investing other people’s money to drive economic performance.
Deals of the Day
Save £300 on the 'Ferrari of lawn mowers' that gardeners are calling 'unbelievable'
Simba’s Easter Sale sees up to 20% off select mattresses, pillows and duvets
Discover the best Easter eggs to indulge in this April – from M&S to Hotel Chocolat
Nintendo Switch 2 games are £10 off with this free promotion
I tested the 'life-changing' under-£20 at-home lash extensions so you don’t have to
‘But we will need to wait and see if further clarity is provided with respect to who is responsible for the overarching investment strategy and who is liable to pay the price if it isn’t successful.’
Do you have a story to share?
Get in touch by emailing MetroLifestyleTeam@Metro.co.uk.
MORE: World’s longest flight where passengers ‘see two sunrises’ set to take off in 2026
MORE: TV presenter Erin Jayne Plummer’s husband Alan dies suddenly two years after wife’s death
MORE: Full list of people eligible for DWP Christmas bonus in 2024
