If you’re in a workplace pension, the UK government has just announced proposed reforms to the system you need to know about. Ministers promise better returns but are downplaying serious risks to your retirement savings.
The government last week announced the biggest shake-up of Britain’s pensions in decades. Ministers want to steer workplace pensions towards riskier investments in British businesses and infrastructure projects, with the stated aim of boosting UK economic growth.
Chancellor Rachel Reeves claims these changes will add £6,000 to the average saver’s retirement pot and unlock £80 billion for domestic investment. It sounds appealing: better returns for you, more money for British business. There’s just one problem: the government’s projections don’t stand up to scrutiny, and the risks to your retirement savings are being seriously downplayed.
The Treasury is making promises about investment returns that would get any private fund manager hauled before the financial regulators. As Tom Selby from AJ Bell puts it: “It is, of course, possible that these assets will deliver greater returns than existing investments, but to suggest this with such certainty without mentioning the risks involved is dangerous.” When politicians start guaranteeing better investment performance with your money, alarm bells should be ringing.
Bigger schemes, riskier bets
Here’s what’s actually happening. The government will force workplace pension schemes to consolidate into much larger funds managing at least £25 billion by 2030. But size isn’t the real agenda here. The government wants your pension to become a vehicle for supporting UK plc.
17 of Britain’s largest pension providers (managing schemes for two-thirds of workplace savers) have already signed up to the so-called Mansion House Accord. They’ve committed to investing 10% of their default funds in private markets, with at least 5% specifically in UK assets.
This matters because most of the 18 million people in workplace pensions stick with their scheme’s default option. Unless you actively choose otherwise, your money will increasingly flow into British private equity, infrastructure projects, and unlisted companies.
Your money, their agenda
The government insists this shift towards UK private investments in workplace pension schemes is voluntary for now. But buried in the small print is an ominous threat: ministers are taking “reserve powers” in the upcoming Pension Schemes Bill to set mandatory investment quotas if schemes don’t comply voluntarily. As one industry observer put it, this is essentially “putting a gun to schemes’ heads”, creating mandatory targets in all but name.
This represents a fundamental shift in how pensions operate. For decades, British pension funds have steadily increased their international diversification, reducing UK investments from more than 50% in 2012 to around 20% today. That wasn’t an accident. It was a rational response to Britain representing just 3% of world stock markets.
Now the government wants to reverse that trend, pushing your pension back towards domestic investment bias that flies in the face of basic investment wisdom.
The risks they’re not telling you about
Private assets (for example, unlisted companies, infrastructure projects, and property developments) are fundamentally riskier than the publicly traded shares and bonds that have traditionally formed the backbone of pension investing. Here’s why:
Liquidity risk: Unlike shares you can sell instantly on the stock market, private investments can take years to exit. If your pension scheme needs cash quickly (perhaps because many members are retiring at once), these assets can become millstones around its neck. Just ask investors in Neil Woodford’s equity fund, which collapsed spectacularly when too many illiquid investments left it unable to meet redemption requests.
Valuation uncertainty: Private companies don’t have daily market prices. Instead, they’re valued by the very people managing them, often using optimistic projections. This can make returns look artificially smooth and impressive, right up until reality bites.
Fee shock: The government admits private equity comes with eye-watering charges, typically 2% annually plus 20% of profits above 8%. Compare that to a typical pension default fund charging 0.5% per year. Those extra fees will “lower the overall return,” the Treasury concedes, somewhat undermining its promise of better performance.
Concentration risk: The push for UK investment concentrates your pension in a single country’s economic fortunes. A globally diversified portfolio has historically delivered better risk-adjusted returns than betting everything on Britain.
The consolidation squeeze
To facilitate this investment shift, the government is forcing dramatic consolidation in the pensions industry. Schemes that can’t reach the £25 billion threshold by 2030 will face penalties, including losing access to auto-enrolment contributions that would be diverted to larger competitors.
The government will also legislate to prevent new pension arrangements from being created, except in special circumstances with regulatory approval. This reduces competition in a market that’s already dominated by a handful of major players.
Ministers frame this as efficiency, pointing to evidence that larger schemes can negotiate better investment fees. But critics worry about the loss of choice and competition. One seasoned commentator warned: “There is a clear danger that conflating government policy goals with those of savers means the latter will be risked in pursuit of the former”
International lessons ignored
Ministers repeatedly point to Australia and Canada as proof that large workplace pension schemes work. It’s true that these countries’ giant pension funds have delivered solid returns over decades while investing heavily in infrastructure.
But there’s a crucial difference: these overseas giants invest globally, not just domestically. Canada’s pension funds own infrastructure across North America, Europe, and Asia. Australia’s schemes have massive holdings in US and international markets alongside their home investments.
The UK government, by contrast, is explicitly pushing for domestic investment bias: the opposite of what these successful international examples actually do.
What happens next
The Pension Schemes Bill containing these reforms is expected before summer. The changes will phase in through to 2030, but this is just “Phase One” of a broader pensions review. Phase Two, launching later this year, will focus on “pension adequacy”, potentially including changes to contribution levels, tax relief, or retirement ages.
There’s also growing speculation about what ministers might do with defined benefit pension schemes that have built up surpluses. Early signals suggest these could be tapped for economic investment too.
Remember, it’s your money
Strip away the political rhetoric, and this reform is fundamentally about using your pension contributions to support government economic policy rather than maximise your retirement income. The promised returns are speculative, the risks are being downplayed, and the loss of choice is being presented as efficiency.
The good news is that you’re not powerless. Most workplace pension schemes offer multiple investment options beyond the default fund. You can often choose more internationally diversified alternatives, lower-risk options if you’re approaching retirement, or higher-growth funds if you’re young and can tolerate volatility.
The key is to engage actively with your pension rather than simply accepting whatever default option your employer has chosen. Check what alternatives your scheme offers, understand the fees and risks involved, and make a conscious choice about whether the government’s vision for your retirement aligns with your own.
If you’re concerned about these changes (particularly if you’re within 10-15 years of retirement and worried about taking on additional investment risk), consider seeking professional financial advice. Look for an adviser who follows an evidence-based investment philosophy rather than chasing fashionable themes or trying to time markets. Evidence-based investing focuses on what decades of academic research tells us actually works: diversification, low costs, and long-term discipline.
An independent financial planner can help you understand your options, whether that’s switching investments within your existing workplace pension scheme or potentially moving to a self-invested personal pension where you retain full control over where your money goes.
After all, it’s your retirement and your money. Don’t let politicians gamble with either.
The government’s Pensions Investment Review Final Report contains full details of the proposed reforms.
LET’S TALK
Are you currently using actively managed funds to invest? If you are, you’re probably achieving sub-optimal returns, and you should speak to a local financial adviser about simpler, cheaper, better alternatives.
Why not book a discovery session with rockwealth Edinburgh’s David Bowen and find out how switching to an evidence-based investment strategy is likely to deliver better outcomes.
Make contact with David here.
IFA and Financial Adviser in Edinburgh
rockwealth Edinburgh is an evidence-based and fixed-fee Independent Financial Adviser situated in Edinburgh, Scotland.About Us: Located in the historic heart of Edinburgh, rockwealth Edinburgh is your committed local financial planning firm. We provide a wide range of financial services, including personalised financial advice, detailed pension and retirement planning, investment strategies, and inheritance tax planning, all designed to support your financial journey in Edinburgh and across the wider region.
Interested to work with us?: Begin your financial journey with us through an Initial Discovery Consultation, completely free of charge and without any obligation. You can visit us at our office, schedule a video call, or call us on: 0131 3928822.
Discover rockwealth Edinburgh at: rockwealth Edinburgh, 23 Melville Street, Edinburgh, EH3 7PE.