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The government wants to change the rules for individual pensions

Size matters when it comes to pension schemes - bigger is better, according to the government

It’s advice to employers and pension scheme trustees is to amalgamate to form wrge multi-company schemes, such as master trusts; however, the main concern is small schemes with fewer than 1,000 members and less than £100m in assets.

The quality of UK pension schemes does not generally look good when compared with giant multi-employer pension schemes in countries such as Canada, Australia, New Zealand, Holland and Denmark. As an indicator of their financial strength and investments, AustralianSuper owns a two-thirds stake in the King’s Cross Project, one of the largest redevelopments in London.

In addition to being able to invest in multi-million-pound projects, these large pension schemes can bulk-buy services such as fund management, which means lower fees. Such schemes can also mean greater returns for members.

Keith Ambachtsheer, the director emeritus of Toronto’s Rotman International Centre for Pensions Management, said that the top pension schemes in the world can add an extra percentage point to the return on a member’s pension pot each year. This could mean a six per cent return rather than a five per cent return, which could have a major impact on the money accumulated by the time the member comes to retire.

The Pensions Regulator believes it is unacceptable to have two tiers of defined contribution pension savers: those who are benefiting from good economies of scale and administration and those who are not. Many pension providers are already offering membership of multi-employer master trusts to clients who have been running single employer schemes.

There is also the government-sponsored Nest, which is a not-for-profit people’s pensions, and large master trusts offered by big household names such as Legal & General and Standard Life.

In the future, it is expected that pension schemes will become more automated. Smart Pension co-founder and managing director Will Wynne said that pension contributions will be a smooth, seamless and automatic process, with contributions paid via payroll software, SMART APIs and HR platforms in five years’ time.

Many employees prefer a single-employer pensions scheme, as they like the direct link between the company they work for and their pension; however, scale is the key to these direct contribution schemes – the larger the scheme, the better the purchasing power in both administration and investment.

The difficulties in merging these schemes into larger master trusts could result from defined benefit schemes, with many designed to pay two-thirds of an employee’s salary for each year of service on retirement. They have tough regulations in place to protect staff who join the scheme, which could make them difficult to merge.

One way around this could be to standardise the terms and conditions, although this could be less favourable than at present. A Department for Work and Pensions green paper – Security and Sustainability in Defined Benefit Pension Schemes – contains proposals for how defined benefit schemes could be consolidated.

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