In a speech at Mansion House on 10 July, the Chancellor Jeremy Hunt set out a comprehensive set of initiatives intended to boost pension savings and investment in British businesses.
He said the ‘Mansion House Reforms’ could increase the average savers’ pension pot by around £16,000, or 12%, with the aim of increasing investment in high growth UK businesses as well as ensuring better member outcomes.
The Chancellor has based his proposed reforms on three golden rules:
- seeking to secure the best possible outcomes for pension savers,
- prioritising a strong and diversified Gilt market and
- strengthening the UK’s competitive position as a leading financial market.
Proposals affecting all scheme trustees
The DWP has issued a call for evidence seeking views on improving the skills of trustees of all types of pension scheme, focussing on three principal areas:
- trustee skills and capability,
- the role of advice and
- barriers to trustee effectiveness.
The Government hopes that improving trustee expertise, particularly as regards investments, might lead to increased allocations to illiquid assets.
The call for evidence confirms the Government’s long-term aim to see consolidation resulting in a smaller number of schemes, as well as a proposal for the Pensions Regulator to maintain a register of all pension scheme trustees.
The “Mansion House Compact”
A voluntary agreement between nine of the UK’s largest defined contribution (“DC”) pension providers – the so-called Mansion House Compact – commits the providers to the objective of allocating 5% of assets in their default funds to unlisted equities by 2030. The Chancellor believes that, if all DC funds follow suit, up to £50 billion could be allocated to “high growth” companies by 2030.
Defined benefit (“DB”) schemes
A second call for evidence by DWP is looking at:
- how DB schemes can be persuaded to invest more in “productive asset classes”,
- the current rules and difficulties relating to the extraction of surplus, other than when a scheme is wound up, and
- the potential benefits of establishing a public sector consolidator for DB schemes and whether there is a rôle for the Pension Protection Fund in this context.
In relation to the ability of employers to extract surplus at a point before wind-up, the DWP asks whether this could encourage more risk to be taken in DB investment strategies and enable greater investment in UK assets, including productive finance assets. It also asked what tax changes might be needed to make paying a surplus to the sponsoring employer attractive to employers and scheme trustees.
The DWP has indeed been busy, as it has also published its response to a consultation it launched in December 2018, on a supervisory regime for so-called Superfunds – a vehicle for consolidating smaller DB pension schemes while severing the link to the employer covenant. So far only one Superfund has been authorised by the Pensions Regulator and it has yet to take on any pension schemes.
Comment
The proposals all sound very worthy on paper but only time will tell whether they will be effective. While there are, certainly, a large number of small DB schemes, many of them now find themselves in a position where they are within reach of being able to secure their benefits with an insurer. The effect of this is that consolidation is likely to happen via insurers rather than commercial consolidators – and insurers have to invest largely in a way to match their liabilities. This means a continuation of the trend towards Bonds, rather than Equities.