Chancellor seeks to unlock the power of UK pension investments

The initiatives aim to boost the economy by channelling pensions savings into higher growth companies

As expected, the chancellor used his annual Mansion House speech last night to announce a series of initiatives designed to increase the amount UK pension funds invest in domestic high-growth companies and to boost returns for pension savers.

The chancellor also announced measures designed to strengthen the UK’s position as a listing destination, as well as plans to reform and simplify the financial services rulebook.

Golden rules

The chancellor set out the “direction of travel” for delivering more investment in UK growth companies by domestic pension funds. Final policy decisions will be made ahead of the Autumn Statement later this year. These decisions, he said, will be guided by three golden rules:

1. Everything the government does will seek to secure the best possible outcomes for pension savers, with any changes to investment structures putting their needs first and foremost.
2. The government will always prioritise a strong and diversified gilt market. Therefore, any changes to the pensions market will be “evolutionary not revolutionary”.
3. Any decisions taken must always strengthen the UK’s competitive position as a leading financial centre able to fund, through the wealth it creates, our precious public services.

Pension announcements

The chancellor went on to outline specific plans and proposals relating to defined contribution (DC) schemes, defined benefit schemes (DB) and the Local Government Pension Scheme (LGPS), as well as exploring the need to create new investment vehicles to make it easier for pension funds to invest in unlisted UK companies and plans to review the culture of pension investment decisions.

The key announcements include:

DC

• Several of the UK’s largest DC pension schemes – namely Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G & Mercer – signed up to the “Mansion House Compact” yesterday in which they committed to the objective of allocating at least 5% of their default funds to unlisted equities by 2030.
• The DWP will today publish its joint consultation response with the Pensions Regulator and the FCA on the Value For Money framework, clarifying that investment decisions should be made on the basis of long-term returns and not simply cost.

DB

• While recognising the important role played by buy-out insurers, the chancellor confirmed that the government will set out plans to introduce a permanent superfund regulatory regime to provide sponsoring employers and trustees with a new scaled-up way of managing DB liabilities.
• The government will launch a call for evidence today on the role of the Pension Protection Fund and the part DB schemes play in productive investment – while being mindful of the need to protect the sound functioning and effectiveness of the gilt market.

Investment vehicles

• The Chancellor recognises the need to ensure that all schemes have access to a wide range of investment vehicles that enable them to invest quickly and effectively in unlisted high growth companies. Alongside the LIFTS competition, the government will explore the case for it playing a greater role in establishing investment vehicles, building on the skills and expertise of the British Business Bank’s commercial arm. It plans to test options to open investment opportunities in high-growth companies to pension funds ahead of the Autumn Statement.

Investment decision making

• The government will look at the culture of investment decisions and improve the understanding of pension trustees’ fiduciary duty across both DB and DC schemes. DWP and HM Treasury will jointly launch a call for evidence to explore how to overcome barriers and ensure a focus on good saver outcomes.

LGPS

• The chancellor wants to accelerate the consolidation of LGPS assets, 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. The government will invite views on barriers to achieving better investment returns across the LGPS as well as setting a direction that each asset pool should exceed £50 billion of assets.
• The government will also consult on an ambition to double the existing local government pension scheme allocations in private equity to 10%, which could unlock a further £25 billion by 2030.

Comment

We welcome the government’s recognition of the need to improve long term returns for pension savers and to do so in a way that unlocks growth capital is extremely welcome. It is crucial the government and industry now build on this and address the deeper reforms needed to improve outcomes for savers and to expand significantly capital for investment in the UK.

This article originally featured on our pensions blog here. For more on the topic of pension investment in the UK economy subscribe to the blog and also read our interview with Herbert Smith Freehills corporate veteran James Palmer.