UK Pension Reform Encourages Greater Investment in Private Markets

UK Pension Reforms: A New Era for Investment and Savings

In a significant move to bolster the UK economy and enhance pension savings, the UK government has unveiled the Pension Schemes Bill 2025. The Bill includes a series of reforms aimed at reshaping the landscape of defined contribution (DC) pension schemes.

This blog explores the key aspects of these reforms and what they mean for both pension scheme providers and individual savers.

Consolidation and Megafunds

At the heart of the Pension Schemes Bill is the requirement for multi-employer DC pension schemes and Local Government Pension Scheme pools to operate at a megafund level. By 2030, these schemes must manage at least 25 billion pounds in assets to continue operating in the market.

This consolidation is expected to bring several benefits. Firstly, it will enable pension funds to invest in larger-scale projects such as infrastructure, new homes, and fast-growing businesses. These investments can drive higher returns for savers.

Evidence from countries like Australia and Canada shows that pension funds managing assets at this scale can significantly boost economic growth while delivering better investment outcomes.

The government anticipates that this consolidation could result in an average earner receiving a 6,000 pound boost to their pension pot at retirement, stemming from the efficiencies gained through consolidation.

Additionally, the reforms are projected to save around 1 billion pounds annually in costs. These savings will be redirected to ensure better governance and more effective use of savers’ money.

Transition Pathways

To support a smooth transition, the Bill introduces two key pathways.

Firstly, providers or master trusts that have 10 billion pounds in assets under management in their main scale default arrangement by 2030 may qualify for a transition pathway. This allows them additional time to reach the 25 billion pound threshold by 2035, provided they have a credible plan and meet other specified conditions.

Secondly, a new entrant pathway is being established for innovative products and collective DC schemes. This pathway will foster innovation and promote diversity within the pension market. It ensures that new and ground-breaking schemes can also contribute to achieving better investment results.

Dormant Pension Pots

Another important aspect of the Bill is the regulation of small, dormant DC pension pots.

Schemes will be required to consolidate pots valued at 1,000 pounds or less, where no contributions have been made for at least 12 months and the saver has not made any changes to their investment.

These pots will be transferred to consolidator schemes. These could include Master Trusts authorised by The Pensions Regulator or schemes regulated by the Financial Conduct Authority.

This reform aims to reduce administrative costs and ensure small pots are managed efficiently for the long-term benefit of savers.

Investment in British Assets

The proposed legislation also gives regulators the ability to encourage or require greater investment in British assets. This may include private equity, private debt, venture capital, and land.

The goal is to reverse years of declining domestic investment and support key areas of the economy.

As part of this initiative, the government has secured a voluntary agreement from pension funds to invest 5 percent of their assets in the UK. This is expected to unlock more than 50 billion pounds for investment in local infrastructure, housing, and scale-up businesses.

Conclusion

The Pension Schemes Bill 2025 represents a major evolution in the management and investment of DC pension schemes in the UK.

By mandating the formation of megafunds, consolidating dormant pension pots, and encouraging investment in domestic assets, the UK government is aiming to strengthen pension outcomes and stimulate economic growth.

For accountancy firms such as Cutts and Co, staying informed about these developments is vital. Advising clients on pension strategies will require a sound understanding of these sweeping changes.

With the first Value for Money assessments scheduled for 2028, there is ample time to prepare. However, it is important to begin planning early.

In summary, the Pension Schemes Bill 2025 is a far-reaching reform that promises better efficiency, stronger governance, and greater investment potential in the UK pension sector. These changes are expected to deliver long-term benefits both for individual savers and for the wider UK economy.