An analysis of the most pressing concerns based on insights from 1,000 UK business leaders.
5 June 2023
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The Chancellor, Rachel Reeves, has made no secret of her desire to see UK pension schemes supporting UK plc. During her Mansion House speech1 on 14 November, she set out more details on how this policy is intended to work, along with an interim report2 on the Pensions Investment Review (phase one of the government's Pensions Review), which was launched on 20 July.
The Mansion House speech
The Chancellor confirmed that, by the end of this decade, there will be "£800bn of assets in workplace defined contribution schemes" but declared that "for too long, pensions capital has not been used to support the development of British start-ups, scale-ups or to meet our infrastructure needs".
She recognised the work that the previous Chancellor, Jeremy Hunt, had done to "encourage more pension fund investment into productive assets", with an admission of the need to go further.
She said that pension schemes in Australia "invest around three times more in infrastructure investment compared to defined contribution schemes in the UK and 10 times more in private equity". A key reason for this, she said, "is the much larger size of their funds", with the UK's pensions landscape remaining "highly fragmented".
She confirmed the government's plans to "create Canadian and Australian style "megafunds" to power growth in our economy and start the most significant set of changes to the pensions landscape since the Turner Review underpinned by a clear commitment to legislate for these changes for the first time in the Pension Scheme[s] Bill next year".
The interim report on the Pensions Investment Review
The call for evidence on the first phase of the Pensions Review ran for three weeks in September. The aims of this review were to boost investment, increase pension pots and tackle waste in the pensions system, with a focus on DC workplace pension schemes and the Local Government Pension Scheme (LGPS).
The report is divided into four "workstreams". There are two on the DC workplace pensions market: scale and consolidation plus cost vs value; one on investment in the UK; and one on the LGPS.
Scale and consolidation
Responses to the call for evidence agreed that scale leads to economies and efficiencies, as well as providing greater expertise and investment diversification. Larger schemes also have more scope for productive asset investment.
However, there is still a wide variation in member outcomes and limited diversity in how pension providers can and do invest. Many larger schemes are either currently not taking advantage of scale, or are schemes of not sufficient scale, to help seek better returns for members and to invest in productive assets.
The DWP and the Treasury have jointly published a consultation3 that includes proposals to accelerate and help enable scale and consolidation in the DC market.
The first proposal covers default arrangements for multi-employer DC schemes used for automatic enrolment: to introduce minimum size requirements for default funds and to place limits on the number of default funds.
The second proposal, which has been under consideration for some time, is to legislate to allow for transfers of members in contract-based pensions without the existing contractual requirement for individual consent to be given. A contractual override would be needed, and the Financial Conduct Authority would consult on these new rules.
Cost vs value
A key objective of the review is generating a greater focus on value, rather than cost, in the DC workplace pensions market.
Investment performance is critical for pension savers. While net returns can account for 60% of a saver's final pension pot, there is often significant variation across pension providers. To help address this, the DWP, the Financial Conduct Authority and The Pensions Regulator are working on a combined value for money (VFM) framework (with further details for trust-based schemes expected in the forthcoming Pension Schemes Bill).
The consultation3 published alongside the interim report2 seeks further evidence on how to incentivise everyone involved in workplace DC pensions to focus on value over cost measures and support interventions like the VFM framework. The interim report considers the role of both employers (i.e. introducing a new to duty to consider value) and investment consultants/advisers (i.e. regulating pension scheme selection advice) in this regard.
UK investment
There is concern that UK pension schemes are investing significantly less in the domestic economy than overseas counterparts. (For example, the DWP has found there is a 30-percentage point gap in the amount of domestic asset investment in UK DC funds compared to those in Australia.) Over the last ten years, there is also clear evidence of UK DC schemes reducing their exposure in UK equities.
The next stage of the government's review will, therefore, consider whether further government interventions may be necessary to ensure that "the significant predicted growth in DC and LGPS fund assets over the coming years, are benefiting UK growth".
The DWP has published a lengthy research paper4 which analyses the trends of UK pension fund investment and the implications for UK economic growth as evidence to support the interim findings of the review.
Local Government Pension Scheme
The focus of the government's review for the LGPS is "to look at how tackling fragmentation and inefficiency can unlock the investment potential of the scheme, including through further consolidation". The government believes change is needed "to ensure that the scheme continues to perform in the longer term in the best interests of members, employers, local communities and the wider UK economy".
The Ministry of Housing, Communities and Local Government is consulting5 on proposals "to put the LGPS on a clearer, firmer trajectory to scale and consolidation that has so far been suggested but not delivered, as well as measures to improve LGPS fund and pool governance and drive local investment". The measures would "require all LGPS funds to delegate the management of all their assets to their asset pool".
Gallagher commentary: Key insights on DC pension reforms and consultation timelines
These proposed reforms are significant, although not unexpected, with a press release the day before giving clear notice that the consultations were to come. The general direction of travel is largely unchanged, despite the change of government, with the key themes of consolidation and VFM continuing to be key priorities for DC pensions.
The deadline for responses to both consultations is 16 January 2025.
The measures for the DC pensions market are scheduled to come into effect from 2030. There are 42 questions in the consultation that will need careful consideration and are unlikely to be resolved and implemented in the short term.
As far as the LGPS is concerned, the government is looking to deliver the proposals as early as March 2026 with an expectation that proposals from the eight asset pools be submitted by 1 March 2025 on how the requirements would be met.
It is important to remember that the interim report merely represents an update on the government's current thinking. The two consultations published on 14 November run for the next few weeks. The government promises "a full and thorough consultation process ahead of the Pension Schemes Bill which will be introduced next year". The final report on the first phase "will further consider domestic investment from pension funds".
The second phase of the Pensions Review is expected to be published "in due course" and will "consider further steps to improve pension outcomes, including assessing retirement adequacy". And, presumably, still covering DC pensions.
We now await further developments noting that policy reforms in relation to DB pension schemes will be separate from the Pensions Review — but hopefully not too far away.
