The UK government is seeking to build a new pension system with its reform programme, according to pensions minister Torsten Bell. The programme aims to transform the UK’s retirement savings system, with a significant shift from defined benefit (DB) to defined contribution (DC) saving.
Torsten Bell outlined five major trends affecting the pensions sector, with the most significant being the shift from DB to DC schemes. While the number of people saving in DC schemes has overtaken those in DB arrangements, this has also come with a transfer of investment, inflation and longevity risk from employers to individuals.
Under the DB system, employers absorbed much of this risk, whereas DC members increasingly bear responsibility for their retirement outcomes, Bell acknowledged. The expansion of DC schemes through auto-enrolment came with increased risk, complexity and adequacy, he said.
DC pots are growing, with the average size doubling from £4,000 in 2019 to approximately £8,000 today. The government relaunched the Pensions Commission last year to review adequacy issues and propose ways to improve savings and outcomes.
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The improving financial health of DB schemes is intensifying the debate around where to invest surplus cash. As Bell explained: “The deficit issue that dominated pensions policy for years is rapidly disappearing.” The Department for Work and Pensions published a consultation on its draft rules for a surplus release regime, setting out guardrails for making payments from DB schemes to sponsoring employers and/or scheme members.
Larger retirement pots are also likely to attract greater attention from fraudsters. Bell warned: “We should all be expecting pension fraud risk in the DC sector to rise as the incentive to defraud people increases.” The industry must shore up its attempts to protect savers and maintain confidence in the pensions system, the pensions minister added.
The government announced a crackdown on small self-administered schemes (SSASs), proposing a new ‘warning flag’ for transfers where there is no clear link between a saver and the scheme to which they are transferring. Bell referred to new regulatory scrutiny of such structures, highlighting the need to protect savers and maintain confidence in the pensions system.
Separately, Bell highlighted the collapse in pension saving among the self-employed, with participation rates falling dramatically over the past two decades. The pensions minister said this issue would be addressed in the final report of the Pensions Commission, expected in early 2027.
The fifth trend Bell identified was consolidation across the pensions market, with the growth of multi-employer schemes, the emergence of DC ‘megafunds’, and ongoing work on small pot consolidation. As he concluded: “We are well outside the world where employees knew exactly what they were being promised and didn’t need to think about it very much. We need to build a complete system that works for people in this new setting.”
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The average DC pot size has doubled in just a few years, from £4,000 in 2019 to £8,000 today.
Meanwhile, the self-employed population in the UK is unusually large, with changes in the nature of self-employment contributing to the decline in pension saving among this group.
As the pensions minister noted, the UK needs to build a complete system that works for people in this new setting.
The Pensions Commission’s final report is expected in early 2027, and it’s likely that we’ll see further developments in the pensions sector in the coming years.
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