UK: What's Happening In Pensions Issue 104 – August 2023

'Mansion House reforms'

In his Mansion House speech, Chancellor of the Exchequer Jeremy Hunt announced what he called the 'Mansion House reforms'. These include multiple proposals for enlisting pension schemes in the push for economic growth whilst also maintaining security and improving outcomes for pension savers. The following day, a raft of consultations, calls for evidence and responses were published. The content is summarised below.

The speech

The Chancellor noted that less than 1% of UK DC pension scheme assets is invested in unlisted equity. To increase this, nine providers representing two-thirds of the DC market and holding more than £4 billion in assets (mostly personal pension providers but also including Nest and other master trust providers) have agreed the 'Mansion House Compact', under which they will work towards an objective of having at least 5% of default fund assets invested in unlisted equities by 2030. More providers and schemes are expected to follow suit.

Announcing the various consultations etc. reported below, the Chancellor set out three "golden rules" for taking the proposals forward:

• "Firstly everything we do we will seek to secure the best possible outcomes for pension savers, with any changes to investment structures putting their needs first and foremost.
• Secondly we will always prioritise a strong and diversified gilt market. It will be an evolutionary not revolutionary change to our pensions market. Those who invest in our gilts are helping to fund vital public services and any changes must recognise the important role they play
• The third golden rule is that the decisions we take 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."

Most of the announcements are to encourage:

• DB schemes to invest more adventurously (ideally in the UK) in order to help grow the economy. That means reducing investment in gilts – though not too much because the Government needs that investment - and increasing investment in 'productive assets' such as private equity and infrastructure. This is against a backdrop of many DB schemes having moved significantly (and increasingly) out of equities and into gilts, corporate bonds and other liability-aligned strategies in recent years, for a variety of reasons. These include increases in interest rates which mean that many DB schemes are now in surplus, resulting in a desire for investment strategies that protect the funding position. The use of leveraged LDI has had a similar effect. Additionally, many schemes have secured liabilities with insurers or are now able to do so.
• DC schemes to allocate more of pension savers' default fund assets to 'productive investments'. Recent changes to the charges cap have facilitated more investment in illiquid assets such as private equity and infrastructure, provided certain criteria are met. Continually putting pressure on small schemes, which are less likely to have good governance and which rarely invest in illiquid assets, to consolidate into master trusts should also make a difference, but the scale is small. The agreement with major personal pension and master trust providers to target 5% default fund asset allocation by 2030 should have the greatest impact.

This is all to be done through a variety of measures but not compulsion.

The consultations and calls for evidence outlined below close on 5 September 2023, except where otherwise noted. Final decisions, where still needed, are to be taken ahead of the Autumn Statement, the date for which has not yet been announced but it is typically in late October or November. Primary legislation, and so Parliamentary time, is needed for many of the proposals.

As regards suitable investment vehicles, the Chancellor said:

See also the item below on the broadening of access to Long-Term Asset Funds. Links:

• The speech
• HMT press release summarising the speech
• Mansion House reforms web page

Defined benefit schemes

• Options for DB schemes – call for evidence – link
  The Government wants DB schemes to invest more in productive asset classes. But it seeks solutions that:
  
  • maintain security for benefits;
  • do not undermine trustees' fiduciary duties; and
  • maintain the stability of the gilts market

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.