Experts have raised alarms that recent government pension reforms could jeopardize the retirement savings of millions, potentially leading to scheme “collapses” and diminished returns.

Concerns from pension specialists, advocacy groups, and industry representatives come on the heels of the government’s announcement to modify laws, allowing employers greater access to pension funds.

There are increasing apprehensions that the reforms mandating pension investments in British assets might adversely affect returns.

On Thursday, the government outlined its intent to amend regulations governing the withdrawal of surplus funds from defined benefit pension schemes, as part of a wider economic strategy.

The administration aims to “remove barriers to extraction” and redefine the thresholds for pension trustees to distribute surplus to employers, with the hope of fostering investment and enhancing productivity.

However, the Pension Security Alliance warned that pension schemes should not be treated as “piggybanks” for external use.

The group expressed that the changes do not align with the interests of over ten million members in traditional private sector pension plans, recalling the government’s prior warnings about the potential insecurity created by surplus withdrawals.

The alliance cautioned that withdrawing funds before ensuring member benefits may lead to financial shortfalls if market conditions shift. This could result in some schemes facing bankruptcy. The group urged government officials to reconsider these plans.

Members of the alliance encompass Just Group, a provider of retirement financial services, Pension Insurance Corporation, an insurer, John Ralfe, a pensions consultant and chair of multiple pension schemes, and various organizations representing senior citizens.

The government has indicated it will engage in consultations regarding the proposed surplus withdrawals, which would only be implemented at the discretion of the trustees and include “strict safeguards” for the protection of savers. Officials assert that more flexible rules could yield benefits for both employers and employees.

According to the Department for Work and Pensions, allowing such access could enable employers to invest in their operations, enhance productivity, increase salaries, or contribute more significantly to pension funds.

The reforms also provide ministers with a “reserve power” to compel pension funds to invest in UK assets should they not do so voluntarily.

James Alexander, CEO of the UK Sustainable Investment and Finance Association, which oversees over 300 financial firms managing more than £19 trillion in assets, expressed concerns about the government’s intentions.

He stated that such mandatory actions might distort market dynamics, create asset bubbles, and potentially diminish returns for pension savers, pushing some schemes towards inappropriate risk levels.

Renny Biggins, head of retirement at The Investing and Saving Alliance, emphasized that schemes should not be forced into decisions that could harm member outcomes. Meanwhile, pensions minister Torsten Bell reassured that the government is not prescribing specific investment strategies.

Currently, pension schemes have the option to return surpluses to employers under certain circumstances, typically during buyouts by insurers. Existing regulations generally prohibit employers from withdrawing surplus funds while administering a scheme.

The government estimates that around 75% of pension schemes are currently in surplus, with approximately £160 billion in surplus assets reported, although other evaluations suggest figures near £360 billion. Changes in economic and demographic factors can quickly alter this balance.

Ralfe stated that any new legislation should be meticulously crafted, defining surpluses stringently and ensuring that employers would be liable for repayment if schemes fell into deficits following surplus withdrawals.

Pension expert Daniela Silcock opined that with appropriate safeguards, the proposed changes could favor savers by making transfers to insurers less appealing.

“If these modifications encourage a greater number of schemes to remain operational and pay benefits directly instead of transferring to an insurer, it could enhance member benefits by maintaining flexibility, reducing transaction costs, and potentially preserving higher benefit values,” she added.