New reforms could mean pensions may grow by smaller amounts if a certain portion of investment in UK companies was mandated by the Government

Government plans to reform the pensions industry and allocate people’s retirement savings towards private investment could end up leaving them tens of thousands of pounds worse off in their later years, according to analysis.

Labour is looking to introduce new laws that will allow it to set legally binding targets for how much pension funds must invest in assets not traded on public stock exchanges.

This means some of savers’ money being directed towards things like infrastructure and property.

But while the Government itself has said this could boost people’s retirements, some pension experts are sceptical, and say its possible that the plans could lead to people’s investments growing at smaller rate.

Projections put together for The i Paper by wealth management firm Quilter show that under the plans, someone earning £40,000 – slightly above the UK average wage – could end up with a pension pot worth £18,000 less than they would do currently.

It also suggested that someone earning £30,000 a year and contributing the standard 8 per cent to their pension – currently the minimum under automatic enrolment – could see their retirement pot end up £13,787 smaller if invested in private markets, than it would if they invested heavily in overseas stocks instead.

This is based on assumptions of 2 per cent inflation and 8 per cent annual growth on pension savings.

Quilter compared a pension with some investments in private equity – as would be the case under Government plans – to a pension with larger investments in stocks in overseas firms.

For someone earning £50,000, the projected shortfall increases to £22,979. And at a £75,000 salary, this shortfall reaches £34,468 – a substantial amount that could meaningfully affect someone’s retirement lifestyle.

The analysis shows that pensions may also end up growing by smaller amounts if a certain amount of investment in UK companies was mandated by the UK Government.

These projections are based on asset allocations used by the Government in its own modelling – however there are many variables with contributions the main source of outcome.

Jon Greer, head of retirement policy at Quilter, noted these are forecasts, not guarantees, and the actual effect on pensions remains highly uncertain.

He said: “The key question here is access – high-quality infrastructure projects are not a given, and ultimately, scheme operators and trustees need to be assured that increasing exposure to UK and private markets will materially enhance pension fund performance.”

The Government reforms come as part of the proposed Pension Schemes Bill and – in essence – the shift would mean savers’ pensions could be directed into long-term projects – like building new homes – rather than traditional listed stocks and bonds.

It is part of a broader Government strategy to stimulate private investment and drive economic growth in the UK but the proposal has sparked a wave of debate.

While some experts believe the strategy could help unlock more cash for pension holders, others remain sceptical about potential risks and returns.

Even the Government’s own analysis, conducted in November last year, points to only a modest uplift of around 2 per cent, which Greer describes as “hardly a game-changer for members”.

The Government argues that its reforms will benefit millions, claiming a £6,000 increase in retirement savings by 2030 as a result of doubling the number of UK pension megafunds.

But experts told The i Paper last week this £6,000 figure is “marginal at best” and unlikely to significantly impact individual savers.

Greer added: “While economies of scale should lead to lower costs – something worth watching closely – return estimates should be approached with caution.

“With projections spanning multiple decades, there are simply too many unknowns to take any one forecast at face value.”

One thing remains clear, according to Greer, and that is for individual savers, the most effective way to grow retirement wealth is not changing investment strategy, it is contributing more.

He explained: “While the UK economy will undoubtedly benefit from greater investment and capital flows, the direct gains to individual pension pots are likely to be modest.

“It’s a win-win scenario overall but make no mistake – the economic victory is far greater than the personal one.

“As policymakers push forward with reforms, the focus should remain on ensuring savers truly benefit.”

The Treasury has been contacted for comment.