Millions of workers with average salaries who save into a pension over their careers could see their retirement savings increase by up to £29,000 as a result of new Government reforms aimed at consolidating small pension pots. The Pension Schemes Bill, which returned to Parliament for its second reading on July 7, proposes combining small pension pots – those worth £1,000 or less – into a single scheme certified as delivering good value.
This is intended to make it easier for savers to manage their pensions and reduce the risk of paying high fees on multiple small pots accumulated through changing jobs. The Bill also introduces requirements for pension schemes to demonstrate they offer value for money, helping savers assess whether their scheme is providing good returns and protecting them from being locked into underperforming funds. Minister for Pensions Torsten Bell said: “We’re ramping up the pace of pension reform, to ensure that people’s pension savings work as hard for them as they worked to save.”
These measures are designed to support around 20 million pension savers and lay the groundwork for a broader review of the pension system, with the aim of ensuring fairness, sustainability, and improved retirement outcomes.
Additional provisions in the Bill include:
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The creation of multi-employer Defined Contribution (DC) “megafunds” with at least £25 billion in assets, intended to drive down costs and enable broader investment opportunities.
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Simplified retirement choices, requiring all pension schemes to offer default options for converting savings into retirement income.
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Increased flexibility for Defined Benefit (DB) pension schemes to release surplus funds, supporting both employers’ investment plans and scheme members.
The reforms are also expected to unlock long-term investment in the UK economy by removing barriers to growth and strengthening pension scheme governance.
For public sector pensions, the Bill will consolidate Local Government Pension Scheme (LGPS) assets into a smaller number of regulated asset pools, aiming to improve investment in local infrastructure, housing, and clean energy.
While the reforms are widely supported by industry and consumer groups, the Government acknowledges that the benefits may vary across different groups of workers.
The upcoming Pensions Review will address issues such as pension adequacy to ensure that underserved groups “don’t miss out” on the benefits from these measures.
Minister for Local Government and English Devolution Jim McMahon OBE said: “This Bill will ensure the Local Government Pension Scheme is fit for the future and harness its full potential, with assets due to reach £1 trillion by 2040, and will strengthen investment in local communities to accelerate growth as part of our Plan for Change.
Zoe Alexander, director of policy and advocacy for the Pension and Lifetime Savings Association (PLSA): “The introduction of the Pension Schemes Bill is a significant milestone, bringing forward necessary legislation to enact important reforms that have the full backing of the pensions industry. This includes small pot consolidation, the Value for Money regime, decumulation options and changes to give DB funds more options for securing member benefits over the long term.
“Once fully implemented, these measures should reduce the cost of administering pensions, remove complexity for savers and help ensure schemes are maximising the value they provide members.”
