DC schemes will be allowed to make bulk transfers of assets into better-performing ‘mega funds’ under legislation announced today.
The government has outlined details of the Pension Investment Review, designed to create scale across the DC pensions industry and boost investment into the UK economy. But the government has allowed some concessions for smaller schemes looking to meet this critical £25bn ‘megafund’ size.
It has confirmed that schemes with £10bn in assets by 2030 will be allowed to continue, provided they can show plans to reach £25bn by 2035. Previously it has said all DC multi-employer schemes would be required to reach £25bn by 2030.
The government has also confirmed it will have ‘reserve powers’ that would force pension schemes to invest in the UK economy, if schemes fail to meet commitments made in the voluntary Mansion House Accord.
A total of 17 DC schemes have already signed the Mansion House Accord, committing them invest 10 per cent of assets in private markets of which half is in the UK. The reforms also include the LGPS schemes which will be pooled to boost overall asset pools and facilitate greater investment into the UK economy.
The government says that by 2030 there should be around 20 ‘megafund’ pensions of this size, rather than the current 10, potentially — releasing around £50bn of funding for UK infrastructure new housebuilding projects and start-up and high-growth business ventures.
The government has also set out how its new ‘value for money’ rules will be measured across different types of pension schemes. This will focus on a range of metrics rather than just cost, with the aim of helping employers, consultants and member determine which are most likely to delver better outcomes for members.
The industry has been calling for legislative change to facilitate bulk transfers from older defaults into newer better performing options, which may include investments into private markets. Currently if DC schemes are set up as GPPs (group personal pensions) this requires providers to seek individual consent before making transfers, leaving many savers languishing in poorly performing older defaults.
These various changes will all be included in the forthcoming Pensions Schemes Bill. Announcing its wide-reaching overhauls of the UK pension scheme the government said that evidence from both Australia and Canada is that scale allows pension funds to invest in big infrastructure projects and private businesses, boosting the economy while potentially driving higher returns for savers.
There were few surprises in these confirmed details, which have been widely discussed and consulted on by Government. The announcement has been broadly welcomed by the industry, although there are concerns about the potential reach of these reserve powers to dictate schemes’ investment policy.
Fidelity International is not a signatory to the Mansion House Accord and its head of platform policy James Carter says: “The Government has introduced a bold package of policies as it aims to boost investment and improve returns for savers, but risks not maintaining a primary focus on pension members’ outcomes.
“Whilst the Government acknowledges progress being made by industry to invest in productive finance assets, the reservation of a power to direct pension scheme investments in the future remains a concern for Fidelity.
“We continue to believe that pension schemes must be allowed to direct pension assets in members’ best interests, without a mandatory requirement to invest in specific markets or assets. “
However he added that he was pleased to see the Government’s commitment to support a pipeline of investment opportunities which he sad hoped would “remain the focus” rather than mandating asset allocations.
Consultants also expressed concerns about the potential reserve powers but said they welcomed the move to allow bulk transfers.
Aon DC solution leader Tony Pugh says: “We welcome the Pension Investment Review and the approach taken to promote better member outcomes by further accelerating the move into Private Markets.
“Scale is an important element here, as long as it is leveraged appropriately to the benefit of members. The target of £25bn for the DC default fund and flexibility to continue to enable innovation and support a competitive market, is a sensible move and, again, should help support better member outcomes.
“While we await further detail, the move to allow transfers without consent from contract-based plans, where it is in members interests, is also welcome and should ensure all members of older pension arrangements can benefit from enhanced investment strategies.”
LCP partner and head of DC pensions Laura Myers says: “Trustees have a crucial role to play in ensuring that pension schemes are run in the interests of their members.
“A greater focus on value for money is warranted and should not trouble the many well-run pension schemes in the UK. But the threat of government telling trustees how they should invest is a step too far. Trustees draw on professional expertise to draw up an investment strategy which will best meet the needs of members, and this should never be over-ridden by the political priorities of the government of the day. The industry has already voluntarily entered into various agreements to ensure that proper focus is given to investing in the UK economy and in long-term productive assets, but anything more than this risks losing sight of the primacy of member interests”.
Barnett Waddingham partner Martin Willis says: “While scale can bring benefits like investment access, efficiency, and improved governance, it’s not a silver bullet.
“Many smaller, well-run own-trust schemes already deliver strong, member-focused outcomes and forcing consolidation risks losing that added value.
“Supporting UK growth is a worthwhile goal, but fiduciary duty must remain at the heart of any reform. Bigger isn’t always better – it’s outcomes that matter most.
He adds: “The government should focus on removing the real barriers – such as legacy guarantees – while offering practical support, including indemnities for schemes that want to consolidate but face structural and legacy hurdles.
Broadstone head of policy David Brooks says: “The Pensions Investment Review is to set out an explicit direction of travel towards mandating pension scheme investment into UK assets and infrastructure.
“This is a risky move – not least because the Treasury itself has had to admit that any gains for savers are unclear and likely to be limited.
“Savers will naturally be worried that their pension pots will not necessarily be invested with the best returns in mind but rather required to achieve specific allocations to Treasury-dictated geographies and sectors.”
He adds: “It is pleasing that the Chancellor has softened her stance, and schemes under £25bn will be allowed to continue operating if they see a path towards reaching that size by the end of the decade. It further sets the scene for significant consolidation right across the market.”
Pension providers that are still below the £25bn ‘megafund’ size also welcomed potential concessions announced today.
Smart Pension CEO Jamie Fiveash says: “We welcome the Government’s decision to extend the timeline for achieving the £25 billion default fund threshold to 2035 for schemes with clear plans and capability to scale. We have a clear AUM trajectory to meet these targets and fully support the inclusion of a Value for Money assessment as a more effective measure of scheme performance than scale alone.”
Standard Life retirement savings director Mike Ambery says: “The UK is an international outlier with a highly fragmented pensions market and the announcement today creates an opportunity for the industry to emulate some of the strengths of the Australian and Canadian pensions markets.
“In those countries a smaller number of funds have been able to achieve higher returns for customers as a result of economies of scale and the potential to invest a broader range of assets, frequently with a greater home bias. The proposals align with the broader government push to introduce a value for money framework that will give savers additional scrutiny as to whether their pension is delivering for them. The consolidation proposals represent a significant moment for UK pensions but a great deal of work lies ahead to make them happen and in a way that supports better outcomes for pension savers.
“With a clear direction of travel now in place for the first phase of the government’s Pension Review, attention will now turn to the proposed adequacy review. This initiative will be a crucial policy step to address the reality that millions are significantly under-saving for retirement. It also presents an opportunity to look at how this challenge is addressed over the long-term, offering a roadmap of gradual changes that will provide individuals and businesses with much needed certainty about the future pension landscape.”
Announcing these plans Chancellor of the Exchequer, Rachel Reeves, said: “We’re making pensions work for Britain. These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses – the Plan for Change in action.”
