How pension freedoms gave you choice, and how the government wants it back
Let me tell you a story about a very convenient arrangement that nobody talks about.
For decades, the pension system in the UK had a beautiful, self-sustaining loop. Companies ran defined benefit (DB) pension schemes. Those schemes needed to match long-dated liabilities: promises to pay people income for the rest of their lives. So what did they buy?
Long-dated government bonds. Gilts. Mountains of them.
The Dutch did the same thing with their pension funds. It was neat. It was tidy. The government issued debt, and pension funds hoovered it up. Everyone was happy.
Then something changed
Pension freedoms changed the game
In 2015, George Osborne stood up and told the country that people no longer had to buy an annuity with their pension pot. You could take your money however you wanted. Drawdown. Lump sums. A bit of both. Your money, your choice.
And people loved it. Why wouldn’t they?
Instead of being funneled into a product that locked your money away forever, you could stay invested. You could have exposure to equities, to global markets, to a broader spectrum of risk that actually matched your appetite and your timeline. Nobody wanted their money sat in long-dated gilts earning next to nothing when it could be invested in growth assets that might actually keep pace with the life they wanted to live.
The whole defined contribution (DC) world exploded. Competition drove fees through the floor. Investment choices expanded massively. Auto-enrolment brought millions of new savers into the system. Providers competed for business on price, on service, on fund range.
It was, dare I say it, a genuinely good time for the pension saver.
But here’s the thing about giving people freedom. Somebody, somewhere, always wants to take it back.
Enter: consolidation
Last year the government kicked off a programme to consolidate workplace pension funds. The headline pitch is about scale. Bigger funds mean lower costs, better governance, more bargaining power. And look, there’s a conversation to be had there. Some small schemes are genuinely poorly run.
But look at what this means in practice.
The proposed threshold is £35 billion in assets. Thirty-five billion.
That doesn’t just thin the herd. It obliterates it.
There will be no new providers. How could there be? You’d need to amass thirty-five billion pounds before you’re even allowed to play the game. The competitive landscape that drove fees down and choices up is being dismantled, one policy paper at a time.
And it gets better.
The government has made it clear that during the “growth phase”, the accumulation years when you’re building your pension, providers will need to allocate to private assets. UK private assets, specifically. If they don’t do it voluntarily, they’ll be mandated to do it.
Now, I’m going to park the private assets conversation for a moment. Providing exit liquidity for private equity and venture capital using people’s retirement savings is a whole article in itself.
But I want to focus on something that nobody seems to be talking about.
The bit nobody’s talking about
So far, all the conversation has been about the growth phase. More equities. More risk. More UK private assets. Fine.
But what about the consolidation phase? What about the people approaching retirement, and the people already in it? The ones in drawdown. The ones who should be de-risking.
Silence.
And that silence matters, because once you follow the logic, it leads somewhere very specific.
Think about it. The government has shown it is perfectly willing to mandate what pension providers invest in during the growth phase. They’ve set the precedent. The principle has been established: we can tell you where to put the money.
So what happens when they turn their attention to the consolidation phase?
If you’re de-risking, if you’re moving towards lower-volatility assets, if you’re preparing for retirement income, what are the “safe” assets the government might steer you towards?
Gilts.
There it is.
Why this should make you uncomfortable
For anyone who doesn’t know, gilts are simply government debt. When you buy a gilt, you’re lending money to the UK government. Long-dated gilts mean you’re lending that money for 20, 30, sometimes 50 years. You’re betting that the government will be good for it over that entire period.
That used to feel like a safe bet. It doesn’t feel quite so safe anymore.
The UK’s national debt is now over 100% of GDP. That’s not a typo. The country owes more than it produces in an entire year.
And it’s not just the UK. The US, France, Italy, Japan, developed nations across the board are carrying debt loads that would have been unthinkable a generation ago.
When debt gets this high, the question stops being “will they pay it back?” and starts being “how are they going to pay it back?” Inflation? More borrowing? Both?
The market has noticed.
Long-dated government debt isn’t the rock-solid, no-brainer investment it once was. Investors are increasingly reluctant to lock their money up for decades when the fiscal outlook is this uncertain. Yields have had to rise to attract buyers, which tells you everything you need to know about demand.
So the government has a problem. The product is getting harder to sell at exactly the moment they need to sell more of it. The old captive buyers (DB pension schemes) are winding down. The free market isn’t exactly queuing up to buy 30-year paper from a country running deficits as far as the eye can see.
What do you do when nobody wants to buy what you’re selling?
You find someone who doesn’t have a choice.
From freedom to mandate
Remember that beautiful loop I mentioned at the start? DB schemes buying government debt?
That loop broke when pension freedoms came in and people stopped being forced into products that needed to hold gilts. The government lost its captive buyer.
And now, through consolidation and mandated asset allocation, they’re building a new one.
I want to be clear about what’s happened here.
Pension freedoms were a genuine, meaningful improvement for millions of people. They gave savers control over their own money. They broke a system that served institutions far better than it served individuals.
But those freedoms are being chipped away, piece by piece, by people who, and I’ll say this plainly, don’t understand pension funds outside of the defined benefit world.
They look at the DC landscape and see chaos where there’s actually competition. They see fragmentation where there’s actually choice. They see a problem to be solved when the market was already solving it better than any regulator could.
Fees came down because providers competed. Fund ranges expanded because savers demanded it. Governance improved because the good providers won business and the bad ones lost it.
That’s what competition does.
State-mandated investing does something very different. It creates captive capital. It provides exit liquidity for private markets that should be finding their own buyers.
And if the consolidation phase follows the growth phase playbook, it provides liquidity for governments that should be finding their own buyers too.
The question you should be asking
Next time someone in government talks about pension consolidation being “for the benefit of savers,” ask them this:
Who’s going to buy the gilts?
Because I think they already know the answer.
They’re just not saying it out loud yet.
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