In this Insight we report on the pension reforms in the Chancellor’s first Mansion House speech, the Pensions Regulator’s diversity and inclusion survey and the results from its annual DC survey together with details of the Pension Protection Fund’s sustainability strategy.
Mansion House speech outlines pension reform package
Jeremy Hunt’s first Mansion House speech led with no less than nine proposed pension reforms, some of which had been heavily trailed in the press beforehand.
The Chancellor began by outlining the positive position of the UK leading the European pension market with a value of over £2.5trn and the success of auto-enrolment before turning to the downsides of a perceived lack of investment in UK ‘high-growth’ companies, certain defined contribution (DC) schemes not providing adequate returns and defined benefit (DB) schemes having smaller returns than certain international counterparts.
These concerns have led to the Government working with the larger pension schemes, insurers, asset managers and pension experts to deliver a raft of pension reforms, some of which will require consultation but in respect of all of which final decisions will be made before the Autumn Statement.
The decisions are precipitated by three ‘golden rules’:
- securing the best outcomes for savers;
- prioritising a ‘strong and diversified gilt market’; and
- building the UK’s position as a financial leader.
The Government believes that the reform package will increase the average earner’s pension pot by more than £1,000 a year in retirement (12%) and make available additional financing for growth to the tune of £75bn by 2030.
DC reforms
Mansion House Compact
Nine of the largest defined contribution pension providers (Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G and Mercer) covering approximately two thirds of the DC pension market have committed to a goal of allocating at least 5% of their default funds to unlisted equities by 2030. The Government would like other DC funds to also come on board.
VfM framework
On 11 July 2023, the Department for Work and Pensions (DWP), the Pensions Regulator and the Financial Conduct Authority will publish their joint response to the value for money (VfM) consultation whose main premise is that investment decisions are made based on long-term investment returns, not just costs.
CDC
The Government will publish a Collective Defined Contribution (CDC) ‘roadmap’ to increase the use of this type of scheme. This will follow the March 2023 consultation (see our insight) on expanding CDC provision to unconnected multi-employers and perhaps allowing CDC decumulation products.
Investment vehicles
Following on from the Long-term Investment for Technology and Science (LIFTS) initiative (see our Insight), the Government wishes to set up more investment opportunities for pension schemes in ‘high-growth’ companies.
DB reforms: superfund regime, PPF expansion
Although DB superfunds have not yet been legislated for, the Regulator has set up an interim assessment and supervisory framework under which, to date, just one superfund has been assessed.
The Government wishes to encourage ‘consolidation’ of the DB pensions sector. In tandem with the existing buy-out market, it will publish its proposals for a ‘permanent superfund’ regulatory regime.
This is likely to involve an expanded role for the Pension Protection Fund (PPF) about which there has been much recent speculation. The Government is to publish a call for evidence on 11 July 2023 exploring how the PPF and DB schemes can aid ‘productive investment’ against a backdrop of guarding gilt market functionality and effectiveness.
The PPF has noted it has ‘unique capabilities’ around consolidation given it is itself a consolidation type of entity. As well as driving down costs, consolidation with the PPF would permit investment in a wider class of assets more akin to how the PPF is able to approach investments.
The PPF’s role in any superfund could range from the smaller end of the DB market (either small and stressed schemes or those with fewer than 100 members) to encompassing all DB schemes being able to voluntarily transfer.
DB and DC: trustee investment decisions
The Government also wants to ‘improve’ trustees’ understanding of their investment duties and will publish a call for evidence looking at how to “overcome barriers and ensure a focus on good saver outcomes”.
Local Government Pension Scheme (the LGPS)
Asset consolidation
The Government will consult on speeding up the consolidation of LGPS assets so that, by March 2025, all LGPS assets will be pooled with each pool to exceed £50bn.
Increase in private equity allocation
The Government is also going to consult on aims to double current LGPS private equity allocation to 10%, which it says will potentially release an additional £25bn in funds by 2030.
The Government is pressing ahead with its plans for consolidation of both DB and DC arrangements and the public sector. It also remains keen for the UK pensions market to increase its investment in both the UK and a wider range of assets. It hopes that in doing so both pension saver outcomes and the financial position of the UK will be strengthened.
The Pensions Regulator round-up
TPR launches first trustee diversity and inclusion survey
The Pensions Regulator has launched its first trustee diversity and inclusion (D&I) survey. Invites to the anonymous, online survey will go to 97,000 trustees of defined contribution and defined benefit occupational pension schemes and to public service pension scheme board members.
Amongst other things, the survey will look at the make-up of trustees from a D&I perspective, ask about their views on D&I, find out what D&I data is being recorded by schemes and how aware trustees are of the Regulator’s equality & DI September 2022 action plan – see here. You can also read about the Regulator’s March 2023 EDI guidance here.
Action: complete the survey if received by the deadline, 4 August 2023, and look out for the results that are expected to be made available before the end of 2023.
DC scheme survey – too many small DC schemes failing on value
The Regulator’s annual DC schemes survey has shown that “too many defined contribution schemes, especially smaller ones, are failing to meet expectations on assessing value”. Just 24% of the DC schemes surveyed were carrying out the annual value for members assessment and 64% of the 208 specified schemes required to do a more detailed assessment were unaware of this requirement. Although the 24% figure is concerning, because larger schemes tended not to fall in this cohort, only 11% of members were in schemes not meeting the VfM expectations.
Climate change is also an issue. Although most master trust and large schemes interviewed were assessing the financial risks and opportunities relating to climate change, far fewer medium (48%) and smaller/ micro schemes (12%) were. All schemes need to spend sufficient time on climate change (and other ESG matters).
The survey results support both the Government and the Regulator’s concerns that smaller DC schemes can struggle to provide good VfM and that this has potential knock-on issues for members who bear the risk of poor investment performance. There are further VfM changes in the offing (see our insight) and the Regulator is also currently undertaking a regulatory initiative to deal with the VfM compliance issues (see our Insight) – this all forms part of the drive for DC schemes to improve VfM where needed or transfer the benefits to a consolidation vehicle.
PPF publishes sustainability strategy
The Pension Protection Fund has published its first sustainability strategy outlining plans for “catalysing the growth of a sustainable pensions industry”.
The strategy focuses on four goals with key performance indicators which will allow progress to be tracked:
- “Demonstrating excellence in responsible investment
- Ensuring effective stakeholder engagement with integrity and respect
- Championing collaboration and leading by example
- Being accountable for minimising our own environmental impacts”.
It also encompasses various targets including using the PPF investment portfolio and stewardship to contribute to Net Zero, reaching Net Zero in the operational supply chain and travel emissions by the latest 2035, and increasing representation in under-represented groups.
Sustainability is gaining increasing traction in the pensions industry, and it is interesting to see the PPF’s take on this. The PPF is aware that the most significant sustainability impact it will have will be in relation to its investments and the PPF’s approach will concentrate heavily on this area.