Chancellor of the exchequer Jeremy Hunt has launched the ‘Mansion House Reforms’ which looks to increase pensions by over a £1,000 a year in retirement for an average earner who saves over the course of their career.
The reforms, which were announced during a speech on 10 July 2023, will also look to unlock up to £75bn ($97bn, €88bn) of additional investment from defined contribution (DC) and local government pensions.
The Mansion House Reforms will be guided by Hunt’s “three golden rules”:
- to secure the best possible outcome for pension savers;
- to always prioritise a strong and diversified gilt market to “deliver an evolutionary, rather than revolutionary, change” in the pensions market; and
- to strengthen the UK’s position as a “leading financial centre to create wealth and fund public services”.
The UK government said the country has the largest pension market in Europe, worth over £2.5trn. Over the past 10 years, automatic enrolment has helped an extra 10 million people save for their futures, with £115bn saved in 2021.
However, the UK government said that how the money is invested is limiting returns for savers. Comparable Australian schemes invest 10 times more in private markets than UK schemes, “reaping the rewards that UK savers are missing out on”.
To level the playing field, Hunt has supported an agreement between DC pension providers Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G and Mercer. They will commit to the objective of allocating 5% of assets in their default funds to unlisted equities by 2030. This could unlock up to £50bn of investment in high growth companies by 2030 if all UK DC pension schemes follow suit.
More effective investments by defined contribution pension schemes will also increase savers’ pension pots by up to 12%, or as much as £16,000 for an average earner.
Hunt said: “British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a year for typical earner over the course of their career. This also means more investment in our most promising companies, driving growth in the UK.”
Nausicaa Delfas, The Pension Regulator chief executive, added: “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.
Value for Money Framework
The Chancellor’s Mansion House Reforms will also look to “deliver better returns for savers” through a Value for Money Framework which will make clear that investment decisions made by pension firms should be based on overall long-term returns and not simply costs.
Pension schemes which are not achieving the best possible outcome for their members will be wound up into “larger, better performing schemes”, the UK government said.
Analysis shows that over a five-year period there can be as much as 46% difference between the best and worst performing pension schemes. This means that a saver with a pot of £10,000 could have notionally lost £5,000 over a five-year period from being in a lowest performing scheme.
The UK government will also encourage the establishment of new collective defined contribution (CDC) funds which can invest more effectively by pooling assets as well as launch a call for evidence to explore how it can support pension trustees to improve their skills, overcome cultural barriers and realise the best outcomes for their pension schemes and subsequently their members.
To improve outcomes for savers in a “highly fragmented market”, with over 5,000 defined benefit (DB) schemes, the UK government will set out its plans on introducing a permanent superfund regulatory regime to provide sponsoring employers and trustees with a new way of managing DB liabilities.
A call for evidence has also been launched on the possible role of the Pension Protection Fund and the part DB schemes could play in “productive investment while securing members’ interests and protecting the sound functioning and effectiveness of the gilt market”.
Kate Smith, head of pensions at Aegon, said: “If we were ever in any doubt, the Chancellor’s Mansion House speech confirms just how important pensions are to the UK economy. The Mansion House Compact is a key step towards encouraging greater investment in private equity by unleashing the superpower of DC pensions. It is critical that this is done in a way that improves member outcomes. Increasing the future value of members’ pensions must be the top priority.
“It’s right that trustees and others governing pension schemes remain focussed on acting in members’ best interests and this should include considering a wide range of investments, without being overly swayed in any particular direction.
“Clearly, the chancellor is looking at a range of government pension initiatives through a dual lens of improving member outcomes and supporting UK economic growth. We welcome the next steps to support this, especially those around delivering a new cross-pension Value for Money Framework and looking for workable solutions to deal with the growing issue of small frozen pension pots. We look forward to being actively involved in these initiatives.”
Tom Selby, head of retirement policy at AJ Bell, added: “The chancellor is clearly desperate to boost long-term growth in the UK but has no appetite to do so through increased government borrowing. Given that context, it is understandable Jeremy Hunt has his eyes firmly set on directing a chunk of the UK’s £2.5trn pensions war chest into the UK economy.
“As these proposals are developed, it is vital the interests of savers are paramount in the thinking of the Treasury, regulators and the wider financial services industry. DC and DB pensions are very different beasts and need to be treated as such, so it is positive the government hasn’t gone down the road of forcing pension schemes to allocate their funds in a certain way. It is also sensible to keep these reforms away from the retail investment world, where illiquid investments are more likely to be problematic.
“The ‘Mansion House Compact’ aim of getting at least 5% of workplace pension default funds invested in unlisted equities by 2030 might be seen as a potential boon for the UK economy, but any such investment needs to be done in the best interests of members. The Neil Woodford scandal exposed some of the challenges big investments in illiquid assets can have and investors will not thank the government if this policy hits the value of their retirements pots.”
In other news, the Department for Work and Pensions (DWP) has launched a consultation about ending the proliferation of deferred small pension pots.
This comes after following the UK government response to the call for evidence “Addressing the challenge of deferred small pots” and consultation on proposals to resolve the small pots issue.
Its previous call for evidence explored two large scale consolidation solutions designed to address the growth of deferred small pots – a default consolidator model and pot follows member.
The DWP said: “From the responses we received, it is clear that both solutions have their merits and would support the first key criteria we set out: the delivery of net benefits to members through the reduction of deferred small pots. However, there was no collective agreement across the responses on the optimal approach.
“We have concluded that the multiple default consolidator model is the optimum approach to addressing the deferred small pots challenge and has the potential to provide greater net benefits to members, ensuring that members eligible deferred pots are consolidated into one scheme.
“We recognise that this approach will not eliminate the future flow of deferred small pots. However, this approach will result in a significant reduction in the current stock of deferred small pots, whilst also enabling the consolidation of future deferred small pots created. Our call for evidence explored whether priority should be given to addressing the stock or flow of deferred small pots first.
“There was no clear consensus about whether either should be prioritised. However, respondents noted that neither a default consolidator nor pot follows member approach would truly eliminate the flow of deferred pots as the pots would have to sit deferred for a period of time before becoming eligible for consolidation.
“In order to stop the creation of new deferred small pots, a more fundamental change to the automatic enrolment framework may be needed. In the future, a simpler system of ‘stapling’, as seen in Australia, (where the members active pension pot is assigned as their pot for life, unless they actively choose an alternative provider) may emerge.
“This would create an environment which is easier for a member to engage with but is clearly some way off in the UK. In this consultation, we have set out the core framework for a multiple consolidator approach and seek views from respondents on whether they agree with the proposals.”
‘Decade of debate’
Steve Webb, partner at LCP, said: “One of the side-effects of automatic enrolment has been the creation of millions of small, ‘deferred’ pension pots scattered across the pensions landscape. It is therefore welcome that the pensions minister has reached a decision on a way forward after a decade of debate.
“However, while consolidation of the very smallest pots into a small number of consolidator vehicles represents a step forward, many people will still find themselves reaching retirement with multiple pension pots. Once the new system is up and running, further thought will be needed to help ensure that savers can get best value from their DC savings.”
Gail Izat, managing director for workplace at Standard Life, added: “We welcome the government’s renewed commitment to make progress on the issue of small pots. With the average person working more than 10 jobs in their lifetime, a side-effect of auto-enrolment has been the exponential growth of deferred small pots which is not in line with our ambition to engage people in better financial futures.
“The government has chosen to proceed with the consolidation option, in which any small deferred pots will be transferred to a pre-determined consolidation destination. We have some reservations with this approach as it currently stands, as it could run the risk of distorting competition. However, we’re looking forward to analysing the proposal in detail and working with the government and industry peers to make it a success for members.
“Our first preference would have been for a ‘pot follows member’, whereby pensions under a certain size automatically transfer when people change jobs. It’s an easy concept for consumers to understand and, in a charge cap environment, concerns about the value for money offered by receiving schemes are lessened.”