Written by James Duggan, Client Director and Professional Trustee at Vidett

The recent ‘Mansion House’ speech by the Chancellor of the Exchequer, Jeremy Hunt, introduced a series of reforms aimed at empowering the financial services sector to improve pension and investment returns for people in the UK.

These changes also aim to increase the supply of investment capital to support the growth of high-potential businesses across the nation.

As the UK’s pension market is the largest in Europe, worth over £2.5 trillion, these reforms carry significant implications for pension schemes and their trustees.

Here are some key takeaways from the speech, the ‘Mansion House Compact’, and other ongoing consultations pension trustees need to understand.

Key takeaways

Unlocking the potential:

The UK’s pension market plays a vital role in providing secure retirement income for retirees across the UK. However, how the money has been invested has been limiting returns for some pension savers. To address this, the Chancellor has introduced the ‘Mansion House Compact’, a voluntary agreement among nine of the UK’s largest defined contribution (DC) pension providers. This agreement aims to allocate 5% of assets in their default funds to unlisted equities by 2030. By diversifying portfolios and investing in unlisted equities, providers can achieve higher net returns, benefiting long-term savers.

The Mansion House Compact includes Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G and Mercer. With over £400 billion in assets and representing the majority of the UK’s DC workplace pensions market, the Compact has the potential to unlock up to £50 billion of investment in high-growth companies by 2030. This could result in pension pots increasing by up to 12%, providing an additional £16,000 for an average earner.

Ongoing & recent consultations

These reforms will have a significant impact on trustees and pension scheme sponsors and are part of a series of ongoing consultations around pensions that will require legislation before becoming law.

Key consultations for pension trustees to note include:

• The Value for Money (VFM) framework – this proposed framework around VFM assessments for DC pension schemes aims to shift focus from costs to value by requiring consideration of factors critical to longer term saver outcomes, including investment performance. The Government-regulator response to this consultation was updated on 25 July 2023 and pension trustees need to be aware of the requirements and The Pension Regulator’s powers of enforcement.

 

• Collective defined contribution (CDC) – this is a roadmap to extend opportunities for CDC, a new type of pension scheme. Contributions are collected in the same way as a DC scheme but are pooled and invested collectively with a view to delivering a sustainable target benefit level, more like a defined benefit (DB) scheme. The Government’s response to the consultation was issued in July 2023 and consultation on draft regulations to extend CDC to whole-life multi-employer schemes including master trusts is expected in the Autumn.

 

• Defined benefit pension announcements – a Department for Work and Pensions call for evidence supports the development of innovative policy around how DB pension schemes could increase investment in productive asset classes. This includes exploring the provision of more equity capital and finance for businesses in the UK. This covers start-ups, infrastructure, and private equity, as well as longer-term investments, typically in illiquid assets – sometimes called ‘productive finance’.

Call for trustee evidence

The government recognises the importance of pension trustees’ roles and wants to ensure they have the skills and knowledge to navigate an evolving and complex regulatory environment effectively. To gather insights into trustee capabilities and barriers they may face, a ‘call for evidence’ has been launched. Trustees of DB, DC and CDC schemes can participate in this process until 5 September 2023. The call for evidence focuses on trustee skills and capability, the role of advice and other barriers to trustee effectiveness, especially when considering diverse investment opportunities.

Recommendations for trustees

• Pension trustees must thoroughly grasp the implications of the Mansion House Reforms and other ongoing consultations. They need to keep abreast of legislative developments so they can adapt to the changing landscape effectively.
• Participate in the call for evidence: trustees, particularly those of smaller pension schemes, should actively engage in the process. Sharing their expertise and operational practices can contribute to shaping the future of trusteeships and pension scheme management in the UK. You can find out more here: Pension trustee skills, capability and culture: a call for evidence – GOV.UK (www.gov.uk)

The Mansion House Reforms present a unique opportunity for trustees to improve pension and investment returns for UK pension savers and support the growth of high-potential businesses. The Mansion House Compact, along with other pension-related consultations, will herald significant changes for pension schemes and their trustees. By actively participating in the call for evidence process and understanding the reforms, trustees can effectively adapt to the evolving regulatory environment and deliver better outcomes for savers.