New legislation which received Royal Assent on Wednesday 29 April should mean over 20 million pension savers getting better value from their providers to the tune of an average £29,000. Tony Watts OBE looks at the finer detail.

The Pension Schemes Bill has had a bumpy ride through the parliamentary process – not least over the controversial “mandation” reserve that allows the government to require certain defined contribution (DC) pension schemes to invest a specific percentage of their assets into UK-based “productive assets”.

That element has been significantly pared back following intense opposition from the House of Lords and lobbying from the pension industry.

The new measures to improve returns for savers have also been refined along the way, but as they now stand, they are promised to benefit 22 million people by driving down costs and boosting average returns on retirement savings of £29,000.

The Act in more detail

The main thrusts of the Act are that it will require pension schemes to prove they are delivering value for money to customers, enable the automatic consolidation of small pension pots, and create larger, better-performing funds.

The consolidation issue has become an increasingly knotty issue as UK workers now spend an average of between just three and five years with a single employer – a significant decrease from the employment model common decades ago when the average was closer to 10 years.

Many people now build up several small pension pots as they move between jobs, making it difficult to keep track of their retirement savings. The new law will enable these pots to be brought together automatically, giving savers a clearer picture of their pension.

The new Act also introduces a “Value for Money” (VFM) framework, protecting savers from being stuck in underperforming schemes.

The VFM framework will standardise how value is assessed, leading to greater transparency and comparability. This, in turn, is projected to drive competition and a long-term focus on value across the DC pensions sector.

In future, pension schemes managers and trustees will need to offer clear default options for turning savings into retirement income, with the aim of giving people who choose this a sustainable income in their retirement.

The creation of multi-employer defined contribution “megafunds” of at least £25 billion, is also projected to down costs and enable investment in a wider range of assets – including in UK businesses and infrastructure.

The Act also paves the way for the upcoming Pensions Commission, which will examine how the UK can ensure future pensioners stay on track for a comfortable retirement.

Finally, the Act also provides Defined Benefit schemes with greater flexibility to release surplus funds – unlocking collectively around £160 billion to support employers and deliver for scheme members.

Full details of the Pension Scheme Act can be found here: Pension Schemes Bill – Parliamentary Bills – UK Parliament together with more details on how the boost to pensions has been estimated.