The Pension Schemes Bill aims to create “bigger and better pension funds” and combine smaller pension pots.

Major pensions update as millions set for ‘retirement savings boost’ (Image: Getty)

Millions of UK workers could see a boost to their retirement savings under a new pensions overhaul set to be introduced by ministers on Thursday.

The reforms, due to be laid out today in the Pension Schemes Bill, are designed to address longstanding issues in the system, including “tidying up” pensions by building “megafunds” and sweeping away “micro” retirement pots. One of the centrepieces of the new Bill is a plan to merge small defined contribution pension pots worth £1,000 or less into a single scheme. With more than 13 million such pots in existence and around one million more created each year since the introduction of auto-enrolment in 2012, the Government believes this consolidation could increase the average worker’s savings by £1,000 and cut administrative costs by £225 million annually.

The Pension Schemes Bill aims to create “bigger and better pension funds” (Image: Getty)

Another key reform will require pension providers to offer clearer default options for turning savings into retirement income.

This is particularly important after the 2015 introduction of “pension freedoms,” which gave savers more control but also led to confusion about how to manage withdrawals.

Work and Pensions Secretary Liz Kendall said: “The Bill is about securing better value for savers’ pensions and driving long-term investment in British businesses to boost economic growth in our country.”

Chancellor Rachel Reeves described the legislation as “a game changer”.

While the new legislation includes a long-discussed “value for money” framework to help savers compare pension schemes, experts warn the reforms fall short in addressing low contribution levels.

Sir Steve Webb, a former pensions minister, called the proposals “worthy” but said they miss the “elephant in the room” of inadequate pension savings.

He said: “This issue is unfortunately on the back burner. Measures such as consolidating tiny pension pots are helpful tidying-up measures, but do nothing to tackle the fundamental problem that millions of us simply do not have enough money set aside for our retirement.”

The Bill will enforce new rules to create multi-employer defined contribution (DC) scheme megafunds of at least £25billion, using economies of scale to invest in a wider range of assets.

To boost further economic growth, the Bill also includes powers to require pension funds to meet UK investment targets if they fail to do so voluntarily. This follows a pledge by 17 of the country’s largest providers to allocate 5% of their assets to UK private markets by 2030.

Pensions minister Torsten Bell said: “Pension saving is a long game, but getting this right is urgent so that millions can look forward to a higher income in retirement.”

Rocio Concha, director of policy and advocacy at Which?, said: “Pensions have become far too complex and fragmented, so it’s good to see the Government taking steps to simplify them and ensure schemes provide value for money.

“Which? has campaigned for years for the consolidation of small pots, so we are delighted that this Bill is seeking to do just that – a move that will provide greater value for savers and support them to keep track of their pensions.”

Sankar Mahalingham, managing director of LawDeb Pensions, added that any reforms that simplify pensions governance and deliver real benefits to savers “should be applauded,” but urged “further scrutiny” to check it fits those criteria.

He said: “Schemes need to ensure the interests of their members are the centre point of any decisions, which is why it’s positive to see that the Government will challenge schemes delivering poor returns. Overhauling small pots, reducing management requirements and making performance crystal clear should also encourage more savers to take notice of their pensions; removing barriers that so often contribute to inertia when it comes to governance.

“However, while the creation of ‘megafunds’ may be an effective way to lower costs and streamline asset options, the Government must ensure that, at its core, this is a driver for increased performance for savers – and not, as may be thought by some, just another tool to serve their agenda for economic growth.”

The Bill’s first reading is scheduled for today.