Chancellor Jeremy Hunt has unveiled plans to release billions of pounds from UK pensions to support “pioneering UK businesses” and boost long-term growth in the UK.
In his Mansion House speech on Monday, Hunt announced that the government has struck a “Compact” deal with the UK’s largest Defined Contribution pension providers, committing them to allocating 5% of assets in their default funds to unlisted equities by 2030. These providers represent over £400 billion in assets and the majority of the UK’s DC workplace pensions market.
According to Hunt, this could unlock up to £50 billion of investment in high growth companies by 2030 if all DC pension schemes follow suit. Currently, UK DC pension schemes invest under 1% in unlisted equity, compared to between 5% and 6% in Australia.
The Government has said the proposals could increase a typical earner’s pension pot by 12% over the course of a career and comprehensive reforms will increase pension pots by as much as £16,000.
In his speech, the Chancellor said the Mansion House Reforms will be guided by three golden rules: to secure the best possible outcome for pension savers; to always prioritise a strong and diversified gilt market; and to strengthen the UK’s position as a leading financial centre to create wealth and fund public services.
Jeremy Hunt said: “British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a year for a typical earner over the course of their career.
“This also means more investment in our most promising companies, driving growth in the UK.”
Secretary of State for Work and Pensions Mel Stride, commented: “Our reforms will benefit savers and society – unlocking investment into pioneering UK businesses, growing the economy, and helping the record number of people in this country saving into a pension to achieve the retirement they want.”
Liz Field, chief executive of PIMFA, welcomed the announcement: “We welcome the Government’s efforts to make the UK more competitive and attractive to investors, and it is right that the Chancellor looks to build on the successful role of the City to ensure it remains one of the leading global financial centres while removing unnecessary regulations that have no relevance for UK financial markets.
“As the Chancellor rightly acknowledges, the UK has one of the largest retail investment markets in the world, and it is right that these Mansion House Reforms are focused on ensuring that British people will gain most from greater investment in growing UK businesses in retirement. PIMFA looks forward to working with the Government on how best this can be achieved.”
However, Tom Selby, head of retirement policy at AJ Bell, said the government must be careful to protect the interests of savers as it develops its proposals.
Selby said: “The ‘Mansion House Compact’ aim of getting at least 5% of workplace pension default funds invested in unlisted equities by 2030 might be seen as a potential boon for the UK economy, but any such investment needs to be done in the best interests of members. The Neil Woodford scandal exposed some of the challenges big investments in illiquid assets can have and investors will not thank the government if this policy hits the value of their retirements pots.
“It is, of course, possible that an investment approach that embraces a bit more risk over the long-term will ultimately boost member returns – but there are absolutely no guarantees. As such, the chancellor’s claim that this new approach will boost the average pension pot by 12%, or £1,000 a year, when they reach retirement should be treated with a huge handful of salt.”
The UK has the largest pension market in Europe, worth over £2.5 trillion. Over the past decade automatic enrolment has helped an extra 10 billion people save for their retirement, with a £115 billion saved in 2021 alone. However, the government believes the way pension funds invest is limiting returns for savers, with comparable schemes in Australia investing ten times more in private markets than UK schemes.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, commented: “Investing in illiquid assets has real potential to boost long-term returns and enhance member outcomes in retirement. It is something that big overseas schemes have done for years, and these plans are likely to provoke real interest.
“It is hugely positive that the push to invest in these assets was not mandated as previously reported. Scheme trustees and pension scheme providers have a duty to do what is best for their members and would resist any moves to push them down a specific route. The fact is that if the opportunities are good enough, then they shouldn’t need to be forced to invest. The key to success for this plan is delivering good quality assets that people want to invest in, at a price they can afford to pay.”
Analysis has also shown that over a five-year period there can be as much as 46% difference between the best and worst performing pension schemes. This means that a saver with a pot of £10,000 could have lost as much as £5,000 over a 5-year period in the lowest performing scheme. Pensions Secretary Stride said the government will facilitate a programme of DC consolidation and pension schemes which are not achieving the best possible outcomes for their members will be wound into larger, better performing schemes.
Morrissey said: “When comparing the UK market with others, such as Australia, it is important to note the key differences – most notably the number of small schemes in the UK. This lack of scale forms a key barrier to investing in more illiquid assets. The need for consolidation within the sector has been discussed for years, not just from an investment but also wider governance point of view – fewer larger pension schemes can negotiate better fees, offer enhanced support, and provide better value to members. These plans will add further impetus to this shift.
There’s a huge focus on generating the best member outcomes with an emphasis on the culture of investment decision making within schemes and trustees’ understanding of their fiduciary duty. Schemes unable to demonstrate achieving good outcomes face being wound up.”
Experts also called for a change in sentiment towards equities and a shift towards highlighting the opportunities available.
According to Hugh Sergeant, portfolio manager of the River & Mercantile UK Recovery Fund, the pensions industry must adopt a new approach to risk.
Sergeant said: “We need to change the DC culture so that it becomes more about long term wealth creation rather than just risk. Pension funds need to stop the focus on risk ‘elimination’ and fee reduction and recognise that creating wealth is about taking on sensible levels of risk. Focus on medium to long term compounding rather than managing short term volatility and minimising costs.
“Finally, the government needs to reinforce the UK’s entrepreneurial culture and its stock market. We should make it more attractive to list in the UK and to increase the number of listed companies back towards previous levels. We have, for example to accept that digital businesses with entrepreneurial management teams have different approaches to governance.”
Hunt also announced that for Defined Benefit pensions, a consultation will be launched on setting an ambition to double existing investments in private equity to 10%. It is a move which could unlock £25 billion by 2030. The consultation proposes a deadline of March 2025 for all Local Government Pension Scheme funds to transfer their assets into LGPA pools and setting a direction that each pool should exceed £50 billion of assets.
Selby said: “Defined contribution and defined benefit pensions are very different beasts and need to be treated as such so it is positive the government hasn’t gone down the road of forcing pension schemes to allocate their funds in a certain way. It is also sensible to keep these reforms away from the retail investment world, where illiquid investments are more likely to be problematic.”
With over 5,000 DB schemes, the Government is also expected to set out plans to introduce a permanent superfund regulatory regime to provide sponsoring employers and trustees with a new way of managing DB liabilities.
David Brooks, head of policy at Broadstone, noted: “Amid confirmation of a string of well-trailed announcements, the Chancellor also conjured a rabbit out of the hat with the unexpected creation of a permanent regime for superfunds.
“Government backing for these long-awaited vehicles will certainly be a fillip for smaller defined benefit pension schemes struggling to attract insurers in a congested market. While superfunds have long been in the offing, weighty question marks remain over how long these reforms will take to implement and create a competitive environment.
“Many schemes will have recently benefitted from improvements in funding levels through the increase in gilt yields over the past 18 months and a viable alternative to the insurance market will certainly be an attractive option.”
