Hunt aims to unlock £50bn for British businesses via pension investment reforms
In the Chancellor's annual Mansion House speech delivered on July 10, 2023, Jeremy Hunt set out a comprehensive set of initiatives intended to boost pension savings and investment in British businesses.
The Chancellor has based his proposed reforms on three golden rules:
- Seeking to secure the best possible outcomes for pension savers, with any changes to investment structures putting their needs first and foremost.
- Prioritising a strong and diversified gilt market – evolutionary rather than revolutionary change.
- All decisions taken must strengthen the UK's competitive position as a leading financial market.
In this briefing, we look at the reforms in the pipeline for DB and DC schemes, and the Chancellor's plans to unlock £50bn by 2030 for investment in private equity and start-up businesses. The closing date for all the consultations outlined below is September 5, 2023.
Proposals affecting all scheme trustees
A new call for evidence seeks views on improving the skills of trustees of DC, DB and CDC schemes. The focus is on three principal areas:
- Existing trustee effectiveness.
- The role of advisers in providing trustee support.
- Barriers to trustee effectiveness.
The hope is that improved trustee expertise, particularly in the investment sphere, could increase allocations to illiquid assets.
The paper confirms that there will be no requirement for boards to include a professional trustee but the Government's long-term aim is to have a smaller number of schemes.
Proposed initiatives affecting DC schemes
The "Mansion House compact"
One of the most significant proposed DC measures is the "Mansion House Compact". This is a voluntary agreement between nine of the country's largest DC pension providers, including household name insurers, to commit 5 per cent of their default fund investments to unlisted equities. It is hoped that this could potentially unlock £50bn for investment in high growth companies by 2030. The effect could reportedly lead to a 12 per cent increase in lifetime pension savings for a typical DC saver resulting up to £1,000 per annum in pension retirement income.
An additional £25bn boost to British business investment is expected to come from the Local Government Pension Scheme and a doubling of its investment in private equity to 10 per cent by 2030.
Planned expansion of the collective DC framework
The Chancellor stated that the Government plans to extend the collect defined contribution (CDC) legislative and regulatory framework to whole-life multi-employer schemes for non-associated and unconnected employers and master trusts. Currently, the framework applies only to single or connected employer CDC schemes. This will allow unconnected employers to pool their assets, allowing improved pension provision for employers unable to set up a stand-alone scheme. The DWP has published a response to its January 2023 CDC consultation, and intends to consult on draft regulations for whole-life CDC schemes in the Autumn.
Proposals for DC decumulation
A new consultation seeks views on proposals to require pension schemes to offer their members retirement products and services to meet their diverse needs. The aim is for there to be broad alignment between schemes so that all DC members provide a wider range of decumulation options for their members. The Government is also encouraging schemes to consider offering a collective DC option for decumulation as an alternative means to access a sustained income. The consultation seeks views on the role of CDC in decumulation and particularly the potential for CDC decumulation-only trust-based schemes.
Green light for DC value for money framework
The DWP has published its response to its earlier consultation on plans to establish a framework comparing the value for money (VfM) of DC default funds offered by schemes. Comparison factors would include investment performance, costs and charges, and service against standardised metrics. Schemes comparing poorly against others would be expected to improve. No timeline has been set out for this project.
A decision on tackling small pots
Following its January 2023 call for evidence, the DWP has set out its legislative plans in a consultation paper seeking views on its chosen default consolidator model. For these purposes, a small pot would be classified as one of £1,000 or less and there would be no minimum size for automatic consolidation. Pots would be eligible for consolidation 12 months after the last contribution. A central clearing house will match eligible deferred pots with a member's chosen consolidator and allocate one where no choice is made. The proposals deal with existing small pots but not those which may arise in future, which may be addressed via changes to the automatic enrolment framework.
Proposed initiatives affecting DB schemes
New options for DB scheme investment
A new DWP call for evidence looks into proposed options for DB investment by focusing on ways that the £1.7tn of DB assets could be invested more productively to benefit members and the wider economy. It seeks to understand the current allocations of DB assets and what may incentivise more investment in 'growth' assets. It also examines the current rules and difficulties relating to the extraction of surplus other than at scheme wind-up. A further area it explores is the potential benefits of establishing a public sector consolidator for DB schemes and whether the Pension Protection Fund should play a role in DB consolidation.
The future for DB superfunds
In its long-awaited response to the 2018 consultation on creating a DB superfund regime, the Government sets out significant detail on plans to introduce a permanent regulatory regime for superfunds, how to define them and the types of scheme to which the regime will apply.
The Government is now due to consider draft primary and secondary legislation to facilitate private consolidators which will be overseen by the Regulator. The new superfund will allow employers to consolidate their liabilities, with the employer covenant being replaced by a capital "buffer" offering members increased security.
Comment
There is a great deal to digest in the Chancellor's speech and the related calls for evidence and consultation responses published by the DWP. Improved governance and increasing options for pensions savers and trustees are ostensibly to be welcomed but are investment proposals with an inward-looking focus going to be right for all?
The proposals are no doubt well-intentioned and could lead to improvements for some savers. However there are perhaps some warnings from history that radical overhaul of the pensions landscape to implement political ambitions is not necessarily a panacea to reinvigorate a flagging economy.
Many past Chancellors have looked to use the nation's pension savings as a springboard to economic recovery and growth and Jeremy Hunt is simply the latest to do so. As far back as 1986, Nigel Lawson imposed a 5 per cent cap on company pension surpluses at a time of soaring stock markets. The intention was to prevent employers sheltering profits in their pension schemes. Employers could use surplus assets above the cap to improve member benefits or take a contributions holiday (otherwise they would be heavily taxed) which many employers did during the 1990s bull market. The 1995 Pensions Act brought in further changes which mandated measures on index-linking, early payment for ill health and dependants' benefits. The 1997 Labour Chancellor Gordon Brown looked at schemes' vast surpluses and abolished the dividend tax credit for pension funds. Once the markets went into decline, deficits soared.
The Chancellor's aim of 'unlocking' pension funds in order to promote growth in UK start-ups and make the UK gilt markets more attractive - whilst simultaneously increasing returns for pensions savers - sounds intriguing and appealing, but there will no doubt be some hurdles to consider.
What Jeremy Hunt did not mention is that investing in stocks is always a gamble. On its face, the prospect of investing in higher growth classes than are traditionally considered gives pension savers access to potentially lucrative new markets but who bears the risk if all goes wrong? As ever, the devil will be in the detail but key will be the extent to which pension trustees feel they can (or can give their asset managers freedom to) allow access to these funds as being in their scheme members' best interests when compared to more traditional assets. Asset managers will also need to be able to provide comfort to their pension scheme clients that investment return targets will be achieved.
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