Broadstone's Head of Policy, David Brooks, weighs in on the potential announcements and themes that could make this speech a turning point for the UK pensions industry.
Broadstone’s Mansion House preview
Following a Budget which aims to fix the foundations of the UK economy, the Chancellor is focusing on growth. Central to that are the next steps on pension reform, which will be set out in her Mansion House speech and aim to unlock more private investment to fuel the Government’s growth mission.
Could the Government mandate schemes to invest in infrastructure?
In the Mansion House speech in July 2023, the former Chancellor Jeremy Hunt announced a Mansion House Compact which asked signatories to allocate at least 5% of the Defined Contribution (DC) default funds to unlisted equities by 2030. The Government is also keen to drive increased investment in Infrastructure. But with little progress made on this so far, could the Chancellor mandate pension schemes to change their capital allocation strategies?
It is well-established that trustees must take account of financially material factors when setting up long-term investments or investment targets. However, Trustees may also balance non-financial matters when making investment decisions, like member sentiment or wider social issues. It’s hard to see how the Government can mandate an investment class without conflicting with the primary duty of financially material factors. If they were to implement this mandate, they would have to consider one of two methods.
Firstly, to create a product that entices enough of the governing bodies of pension schemes to see the investment as an offer too good to be true. This may be best achieved by tax breaks (unlikely this close to a budget) or a first loss protection – for example, joint investment with the Government who can take the hit if performance is poor.
Secondly, socialisation of investment for the country’s good. Almost a moral or social contract argument that gives trustees good reason to invest in a certain way. ESG is now a material factor but it has taken many years under this method to increase engagement of governing bodies to invest with consideration of ESG risks and opportunities. The Government will need reform to happen quickly and in the glacial world of pensions it may require something akin to the former than the latter.
A Canadian-style LGPS overhaul
We should expect a big shake-up for Local Government Pension Schemes (LGPS). With £360 billion in assets, the potential is enormous. Taking a page from Canadian pensions, which have led the way in infrastructure-focused investments, the Government may push LGPS towards a more aggressive, strategic approach to investment.
Accelerating consolidation in DC schemes
DC schemes are likely to be in the spotlight as well, with the Chancellor eyeing accelerated consolidation especially among those with weaker performance. Current frameworks, like ‘Value for Money’, encourage consolidation among smaller schemes, but there’s a chance we’ll see teeth added to these plans to speed up the process. That could potentially include allowing regulators like The Pensions Regulator and the Financial Conduct Authority to compel transfers of schemes that fail to meet value-for-money criteria. For the pensions industry, reforms are likely to target a consolidation frenzy in the coming years.
DB Schemes: Keep calm and carry on
When it comes to Defined Benefit (DB) schemes, the Government seems to have gone cool on unlocking scheme surpluses. However, a subset of schemes may be interested and the surplus of larger schemes could be significant potentially unlocking billions of pounds for investment. The emphasis is likely to focus on steady management while nudging those with surplus funds towards growth-focused investments and end-game options. For those without surplus, however, the message may simply be to keep calm and carry on.
The Pensions Review – Part II incoming?
We are expecting Part II of the Pensions Review which could be announced in the Mansion House speech.
This phase will look at pension adequacy and outcomes. With a focus on increasing money going into pension pots. There are a number of big picture ideas including side-car savings and early access to pensions. Tax relief on contributions may come round again with a flat rate relief of 30% being a boost to basic rate taxpayers. Following hot on the heels of the National Insurance rise for employers, mandating pension contributions in the short-term appears unlikely.
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