Recent changes proposed by Chancellor Jeremy Hunt involve allocating a portion of default fund assets to private UK companies, aiming to boost pension pots. While private equity investments can yield substantial profits, they also come with higher risks, raising concerns from UK pension holders.
In this article, we explore Jeremy Hunt’s new plans, what this could mean for UK expats and how you can still take control of your workplace pension.
What are default funds?
Currently, statistics reveal that approximately 90% of individuals contributing to their workplace pension scheme end up in the so-called default funds.
Default funds are where your money is grouped with other people’s in a mix of investments, and is usually managed for you, often to control risk level as you get older. As the name suggests, these default funds are the default option if savers do not explicitly indicate their preferred investment choices. While not necessarily terrible, default funds often fail to deliver optimal returns compared to other investment options.
What do workplace pension default funds yield?
Data from the investment manager AJ Bell indicates that the average ABI Mixed Investment 40-50% Shares fund, similar to many default funds, has yielded a mere 56% return over the past ten years. In contrast, the average Global equities fund has outperformed significantly returning 131% over the same period.
The essence of default funds lies in their adherence to a “lifestyling” strategy, wherein your investment portfolio aligns with your retirement age. Younger savers start with a more significant allocation to stocks, offering the potential for higher growth.
As they approach retirement, the allocation to volatile assets gradually reduces in favour of more stable bonds and cash. This strategy aims to minimise the risk as the time approaches to access the funds. However, the Chancellor is looking to change this current pension landscape.
Jeremy Hunt’s workplace pension changes
Recent developments see Jeremy Hunt, the Chancellor, unveiling a plan that he believes will stimulate the economy and boost pension pots. In a significant commitment, nine leading pension firms responsible for managing a staggering £400 billion in savings have pledged to allocate 5% of their default fund assets to unlisted equities by 2030.
Unlisted equities refer to investments in private companies yet to be listed on the stock exchange. Such companies typically find themselves in the early stages of development and may still need to achieve profitability. Historically, these investments were the domain of sophisticated and wealthy investors due to the higher risks involved.
The allure of private equity lies in the potential for substantial profits when the companies mature and succeed. However, it’s essential to recognise that there are no guarantees, and many ventures may fail, presenting potential risks for pension savers.
Workplace pension changes – the concerns
Any misfortune resulting from poor private equity investments could tarnish not only the reputation of the pensions industry but also undermine savers’ confidence in contributing to their retirement funds. Given that many people are already struggling with under-saving for retirement, there are undoubtedly more pressing pension issues that necessitate attention.
These issues include expanding auto-enrollment to encompass low earners and part-time workers, facilitating the portability of pension pots across different jobs to prevent losses, and striving to minimise charges associated with pension management. Moreover, efforts to fulfil the long-awaited pensions dashboard promise from the government, made almost a decade ago, should also be prioritised.
While private equity is not intrinsically a bad investment choice, it requires careful consideration and expertise. The long-term nature of pensions does make them well-suited for private equity investments, but pursuing such opportunities necessitates thorough research, specialised skill, and a high degree of risk tolerance.
Regarding the chancellor’s claims that his plans will boost pension pots by 12%, adding an extra £1,000 annually for retirees, it’s essential to approach such assertions cautiously. The outcome cannot be guaranteed, and if pension funds invest in several private companies that subsequently fail, savers may end up with less money for their retirement.
Certain pension holders will not be impacted by the chancellor’s proposed plans. Those with self-invested personal pensions or defined benefit schemes are excluded from the intended changes. Similarly, individuals who have already moved out of their pension scheme’s default fund will be unaffected.
Why you still can take control of your workplace pension
One concerning aspect arises from the fact that the government conveys conflicting messages. On the one hand, they encourage savers to fund their retirement independently, yet on the other hand, they seek to dictate how those savings should be invested. Nevertheless, individuals still possess the freedom to make investment choices for their pensions, including choosing to invest in private equity.
Opting out of the default fund is relatively straightforward; reaching out to your pension provider or accessing your account online allows you to select your preferred investment options from the company’s range of choices. Some companies offer diverse options, while others may provide a more limited selection.
The younger the individual is, more often than not the more risk they can afford to take. Additionally, some companies may have in-house advisers who can assist employees in making informed decisions; reaching out to the HR department can help access such services.
How best to manage your workplace pension
Drawing from personal experience can be insightful when managing pension investments. For instance, opting for an “adventurous” fund, known to be the riskiest option offered by a pension firm, may present the possibility of higher returns, particularly for individuals still several decades away from retirement. Having a higher risk tolerance can make such a decision more feasible.
Given the current financial climate, it’s an opportune time to review one’s investment choices. Taking the initiative to exit the default fund and actively manage your pension investments empowers individuals to take control of their financial future.
Such an approach ensures that their hard-earned savings are directed towards investments that align with their long-term goals and risk appetite, ultimately increasing the likelihood of achieving a secure and comfortable retirement.
Brite can help with your workplace pension
If you are an expat with a UK pension that’s signed up and has a workplace pension, it could be a good idea to transfer it to an overseas pension.
Brite can advise you on what to do if you want to know more about transferring your workplace pension to a new nation. Several overseas pension schemes are available – including QROPS (or ROPS), QNUPS or SIPP.
Contact Brite here if you have a UK workplace pension, or another type of pension, and want to take full advantage of its potential.