Jeremy Hunt, the UK’s chancellor of the exchequer, has announced plans to unlock up to £75bn of additional investment from defined contribution (DC) and Local Government Pension Schemes (LGPS) to help grow the UK economy and deliver benefits to savers.
In his first Mansion House speech last night, Hunt said the reforms aim to secure “best possible outcomes for pension savers” while prioritising a “strong and diversified Gilts market” and strengthening the UK’s competitive position “as a leading financial centre”.
Hunt noted that the UK pension market is worth over £2.5trn and benefitted from 10 million extra people saving in the past 10 years through the introduction of auto enrolment.
However, he said that institutional investors are not investing enough in UK high-growth companies.
As part of his Mansion House reforms, the chancellor announced a number of DC measures, including a programme for DC consolidation facilitated by the government, to ensure that funds are able to maintain a diverse portfolio of bonds, equities and unlisted assets, and deliver the best possible returns for savers.
The Department for Work and Pensions (DWP) has also published its response with The Pension Regulator (TPR) and the Financial Conduct Authority on the Value For Money framework, clarifying that investment decisions should be made on the basis of long-term returns and not simply cost.
Hunt said that the pension schemes which are not achieving the best possible outcomes for their members will face being wound up by TPR.
The chancellor added that the government will also set out a road map to encourage collective defined contribution (CDC) funds.
The speech also focused on accelerating the consolidation of LGPS assets.
Hunt said the government will consult on this with a deadline of March 2025 for all LGPS funds to transfer their assets into local government pension pools and ensure greater transparency on investments.
To make sure maximum benefits of scale are delivered, Hunt added that the consultation will invite views on barriers to achieving better investment returns across the LGPS funds as well as setting a direction that each asset pool should exceed £50bn of assets.
Hunt also expressed the government’s ambition to double the existing LGPS allocations in private equity to 10%, which could unlock a further £25bn by 2030.
For defined benefit (DB) schemes, Hunt also announced plans to introduce a “permanent superfund regulatory regime to provide sponsoring employers and trustees with a new scaled-up way of managing DB liabilities”.
He added that “having engaged closely with a range of experts” the government will also launch a call for evidence today on the role of the Pension Protection Fund and the part DB schemes play in “productive investment” while aiming to protect the “sound functioning and effectiveness of the Gilts market”.
Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association, said: “With the right policy and regulatory initiatives, and support from the right type of fiscal incentives, there is a potential for a win, win, win – for pension savers, schemes and the UK economy.
“However, this is a complex area, and it is easy to get the wrong outcomes, so the government is right to propose undertaking a public consultation on all the key issues over the next couple of months.”
Nausicaa Delfas, TPR’s chief executive officer, said: “These reforms support our ambition for pension savers to be in large, well-run schemes that deliver good outcomes at every stage of their retirement journey.
“They will drive a long-term focus on value, encouraging schemes to invest in the full range of asset classes to deliver higher returns for savers.”
She added that the value-for-money framework will “shine a light on schemes that consistently underperform, and new powers will allow us to enforce consolidation where necessary”.
“Similarly, the expansion of collective defined contribution schemes (CDCs) and introduction of a permanent regime for pensions superfunds all represent a welcome boost for innovation in savers’ interests,” Delfas continued.
Michael Moore, CEO of the British Private Equity & Venture Capital Association, said: “Overseas pension funds are investing 16 times more than domestic pensions in British venture capital and private equity and reaping the rewards for savers.
“Alongside voluntary action, which is welcome, we need government and industry to work together urgently to drive radical action to deliver scale and capacity among the UK’s 28,000 DC pension schemes.”
He added: “While investment into the UK is a welcome vote of confidence, relying so heavily on foreign investment to scale up UK companies will hold the UK back.
“The UK needs to become world-class at both creating knowledge-intensive companies and scaling them up.”
DC pension schemes sign up to Mansion House Compact
A number of large DC pension schemes have signed up to Mansion House Compact announced by chancellor Jeremy Hunt in his Mansion House speech last night, committing to boost investment in UK unlisted equities.
Hunt said that CEOs of Aviva, Scottish Widows, Legal & General, Aegon, Phoenix, NEST, Smart Pension, M&G and Mercer all signed up to the Mansion House Compact.
He explained that the compact commits these DC funds, which he said represent around two-thirds of the UK’s entire DC workplace market, to the objective of allocating at least 5% of their default funds to unlisted equities by 2030.
Currently, the DC schemes’ investment in UK unlisted equities is under 1%.
The chancellor added that if the UK’s DC market follows suit, this could unlock up to £50bn of investment into high-growth companies by that time.
Tim Orton, chief investment dfficer at Aegon UK, said: “Aegon UK is proud to be a founder signatory of the Mansion House Compact which will help deliver better long-term outcomes for our customers.
“We are committed to ensuring our customers can access and share in the growth and success of innovative companies we invest in. We will use our scale and expertise to develop investment solutions seeking to improve the retirement outcomes of the millions of members of the defined contribution pension schemes we support.
“The Compact will also create opportunities that help deliver our climate targets as we progress towards net zero.”
Ruston Smith, chair of Smart, said: “Smart Pension is committed to securing better outcomes for long-term savers. Giving UK savers access to higher net returns by investing in unlisted equities, including innovative, high-growth UK companies as part of a well diversified portfolio, will deliver these outcomes over time.”
Scottish Widows’ CEO, Chirantan Barua, said: “The industry needs to modernise the investment options available to customers. With the right consumer protections in place, the proposals announced today could make a huge difference to our customers and the wider UK economy. I’m proud that Scottish Widows is a founding signatory of the Mansion House Compact.”