Chancellor uses Mansion House speech to foreshadow a raft of proposed changes to the UK pensions regime.
The Chancellor, Jeremy Hunt MP, used last night's Mansion House speech to announce plans to get UK pension funds investing in high growth UK companies through evolutionary change to the pensions market. Below we set out the Government's key objectives, the four responses it has made to previous consultations and the five fresh consultations and calls for evidence that it has set in motion today.
Nine of the larger defined contribution (DC) pension providers in the UK have pledged to allocate five per cent of assets in their default funds to unlisted equities by 2030, as part of the Mansion House Compact – a new, non-legally binding agreement. The Chancellor believes that this, in combination with the other measures being announced, will have the dual benefit of boosting investment in UK industries while also potentially increasing a saver’s retirement outcomes to the tune of 12% over their working life, or £1,000 a year in retirement for a typical earner.
The Chancellor also revealed plans to consult on encouraging local government pension schemes to invest in private equity. Although this consultation has not yet been released, it has an objective of channelling £25 billion into such assets by 2030.
Among the many consultations emerging today are several that seek to make it easier for trustees to invest in growth assets without compromising their fiduciary duties. To this end the DWP has been working up the details of collective defined contribution (CDC) schemes which it believes can avoid risks to employers while allowing members to benefit from higher pensions driven in part by holding growth assets for longer than in DC schemes. Its response to an earlier consultation identifies next steps to be taken through secondary legislation, which it intends to publish in draft later this year.
The requirement for the default arrangements of DC schemes used for automatic enrolment to comply with the charge cap has led to a strong focus on ensuring low investment costs, which has made schemes reluctant to invest in more expensive but potentially higher growth assets. With an eye on getting better returns for savers, the DWP, the Pensions Regulator (TPR) and the Financial Conduct Authority have published a joint response to their January 2023 consultation on a new value for money framework. The DWP seeks to move away from the focus on short-term costs that has dominated decision-making and instead to require trustees to ask themselves if they have the scale and expertise to ask tough questions about whether they are sufficiently diversified to deliver higher returns for savers.
The majority of the original proposals are unchanged. The DWP and regulators’ intention is to create a framework of regulatory tools to support trustees’ compliance with the new framework and deliver value for money assessments, including a prescribed list of data points that schemes may be required to disclose. One notable change is the decision to move to a gross investment performance measurement rather than one that is net of all costs and charges. Furthermore, the DWP has accepted the overwhelming feedback that there will be significant overlap with the Chair’s statement once the new framework is implemented and therefore proposes to phase out the Chair’s statement in its entirety. Unless trustees can demonstrate value for money, DWP plans to empower TPR to wind up schemes in the interests of savers.
One of the inevitable consequences of automatic enrolment has been that short periods of employment generate small funds. Following earlier work, the DWP has published ‘Ending the proliferation of deferred small pension pots’ which responds to an earlier consultation and asks a number of new policy questions. The DWP proposes a way forward built around the default consolidator model which would enable a small number of authorised schemes to act as automated consolidators for small pots. The DWP will bring forward primary legislation to deliver this when parliamentary time allows and will commission an industry delivery group (similar to that for Pensions Dashboards) to address design questions.
In its ‘Consolidation of defined benefit pension schemes’ consultation the Government reiterates its support for superfunds and sets out plans to introduce a permanent superfund regulatory regime that allows a middle course between the Pension Protection Fund and buy-in/buy-out. The proposed regime is intended to remove the risks to members of employer insolvency, allowing employers to concentrate on running their business and making it feasible for consolidated schemes to invest in growth assets.
The Government has also launched a call for evidence on how it can encourage DB schemes to invest in productive asset classes – without risking members’ benefits, undermining trustees or destabilising the gilt market. This covers areas that our recent White Paper has explored concerning the opportunities that surplus creates.
The Government’s response to this consultation focuses on the product and services elements of the previous call for evidence and to the public consultation on how savers user their money in the decumulation phase. This consultation sought views on a DC decumulation framework, and the Government now proposes that a requirement be placed on trustees to offer a decumulation service that will provide support at the point of access that is suitable for their members and consistent with the pension freedoms – possibly including an offer to join a CDC scheme in retirement. Schemes would have to provide the service in-house or by partnering with third-party provider.
At the same time as proposing to add to their responsibilities with a new decumulation duty, the DWP is also launching call for evidence to explore whether trustees are performing their roles effectively and in a way which results in the best outcomes for savers. The DWP wants to assess trustees’ skills and capability, the role of advice and barriers to trustee effectiveness, and it particularly wants to assess whether trustees are adequately equipped to consider the full breadth of investment opportunities. It is also considering whether to provide trustees with unique identifiers to facilitate TPR’s monitoring of trustee development and activity, and to mandate standards for professional trustees.
