UK Chancellor Rachel Reeves is expected to further flesh out in her Mansion House speech this evening (14 November) her ideas for steering pension funds, as major institutional investors, to invest in certain types of UK assets that the Government sees as key to boosting UK economic growth – as well as retirement outcomes for the UK’s pension savers.
In trying to try unlock up to £80bn in investment in assets like infrastructure and UK growth companies, the Government will introduce legislation that will merge 86 local government pension schemes into a ‘megafund’ that will manage assets worth about £500bn by 2030.
But there will also be an attempt to encourage the consolidation of private sector workplace schemes. Reeves has told the FT she is targeting a minimum size for multi-employer defined contribution pension schemes of £25bn to £50bn to ‘facilitate their consolidation into megafunds’.
Jason Hollands, managing director at UK wealth management firm Evelyn Partners, said: “Rachel Reeves is expected to set out plans for so-called pension megafunds across both local government and the private sector, where it is hoped economies of scale and the pooling of risk will drive investment into the domestic economy and boost retirement outcomes for the growing army of UK workplace pension savers.
“She is trying to drive greater investment in things like infrastructure projects, growth companies and private assets but with a UK bias, which could involve some sort of guideline to invest a certain amount in UK equities.
“The UK pension fund industry’s dwindling allocation to UK assets has been a major factoring choking off capital for UK equities and, in turn, seeing many fast growing British companies choose to list in the US where deeper pools of capital are available and they can command higher valuations. Reeves’ reforms will almost certainly go further than Jeremy Hunt’s “Mansion House Compact”, a voluntary commitment made by many of the UK’s largest pension funds, to allocate at least 5% to unquoted growth companies by 2030.”
Hollands continued: “The plans for the public sector seem workable. Public sector defined benefit schemes are a lot easier to merge and regulate than private sector firms that provide defined contribution pensions to employers and where investment choice and performance has a direct impact on retirement outcomes.
“The challenge will be the attempt to merge these defined contribution schemes in the private sector, where it is estimated £800 billion worth of assets will be managed by the end of the decade. It sounds like the Chancellor is a fan of the multi-employer master-trust model, which she wants to extend to more firms that have a contract with a pension provider – often one of the big UK insurance companies – which in turn provide a pension policy to each worker.
“It will be interesting to see how consolidation across these workplace pensions managed by the big insurers would happen – and if it did, how that would look to the individual savers in terms of the choices they can make, fee levels and over time, returns.
“The current situation might be unsatisfactory, where employees end up with multiple pots accumulated through their career, at different DC providers of varying performance. But it’s unclear how top-down reform will work, and how such schemes – and therefore individual savers – can be corralled into investing in certain sectors.
“Private businesses are cautious after Ms Reeves’ £25billion National Insurance tax raid in the Budget, which could not only limit the generosity of pension benefits at some firms, but also make companies understandably wary of workplace pension reforms that threaten to add further to admin, HR and payroll costs.”
He further said: ‘Finally, in seeking to steer pension funds to allocate greater amounts into UK assets – at least of certain types – the Chancellor is first and foremost thinking about the economic boost it could bring and the funding of the Government’s priorities such as renewable infrastructure.
‘Whether this will lead to better returns for members of the schemes is a moot point but is less relevant in respect of defined benefit pensions where retirement incomes are linked to previous earnings, not returns made, and the risk sits with the employer not the employee. Returns from investing in private companies have been strong over the last couple of decades and so it is argued that this will result in better outcomes, but the last couple of decades were also a period of ultra-low low interest rates which favoured the use of debt in deal structures often used by private equity investors.
‘A key question in all of this is whether measures to increase pension fund allocation into UK assets will be mandated or incentivised – in other words whether we will see a stick or carrot-based approach. From the perspective of those relying on good investment returns in DC schemes, as well as those managing pension funds, the freedom to allocate to wherever offers the greatest potential is important and therefore mandated restrictions would be a hinderance to that flexibility.’
