Labour’s Pensions Review – The pension industry’s Big Bang: Phase 1 activated
On 20 July 2024, the Government announced a “landmark pensions review…to boost growth and make every part of Britain better off.”
Penny Cogher and Harriet Fletcher take a closer look at the announcement:
On Wednesday 17 July we commented on the King’s Speech and expressed the hope that work on the Pensions Review promised in the Labour manifesto would commence continue in the background.
Well, we didn’t have long to wait – on Saturday 20 July HM Treasury, the Department for Work and Pensions (DWP) and the Ministry of Housing, Communities and Local Government (MHCLG) and their ministers issued a joint press release announcing a “landmark pensions review…to boost growth and make every part of Britain better off.”
According to the Press Release, this Landmark Pensions Review aims to boost investment, increase pension pots, and tackle waste in the pensions system. It will explore how to leverage the £360 billion Local Government Pensions Scheme and reduce the £2 billion spent on fees. Work on this will start immediately: the Chancellor and the Prime Minister are chairing a roundtable with the pensions industry on 22 July 2024 and the first Growth Mission Board, chaired by the Chancellor, takes place on 23 July 2024 with a remit to “drive the Government’s work to achieve the highest sustained growth in the G7.”
The first stage of the review is due to “report in the next few months and consider further measures to support the Pensions Bill. It will take account of the need to prioritise gilt market stability, liquidity and diversity.”
Future phases of the review will continue to assess retirement adequacy and further steps to improve pension outcomes and to increase investment in UK markets. This ties in with the statement in the Kings Speech, echoed in the Press Release, that the New Pensions Bill could boost pension pots by over £11,000 through consolidation and broader investment strategies. Furthermore, with an investment shift of 1 percentage point shift of assets into productive investments, defined contribution schemes could deliver £8 billion of new productive investment into the UK economy.
The Chancellor, the Deputy Prime Minister and the Pensions Minister, Emma Reynolds, are all quoted in the Press Release. Emma Reynolds highlighted the dual focus of the review, noting, “As the first ever joint Treasury and DWP minister, I am uniquely placed to tackle the twin challenges of productive investment and retirement outcomes. Over the next few months, the review will identify actions to drive investment and explore long-term challenges to ensure our pensions system is fit for the future.”
Industry leaders, including Legal & General and Aviva, have expressed support for the review, highlighting its potential to enhance returns and stimulate economic growth.
Our view:
According to the Government, defined contribution schemes will manage around £800bn in assets by the end of the decade. We agree, this, alongside the industry being worth £2 trillion, is a source of “untapped potential”.
We welcome the pensions review and are pleased to see the widespread enthusiasm from the pensions industry to work with the Government. We hope the certainty of a five-year parliamentary term with a large majority will enable an in-depth review and address the looming problem of insufficient retirement income, as well as building up, driving forward and promoting UK PLC.
English pensions law encourages prudent and diversified investment by pension trustees. Without some legal override, the trust law position struggles even with concept of stewardship and ESG investment strategy. Pension fund managers are rewarded for relatively short term gains and investment strategy is assessed on a global return basis, with charges and returns being an intrinsic part of this structure. Given that the new Government’s ambitions for DC pensions in particular to become a powerhouse for the UK, perhaps the time has come for the Government to be brave and to do away with the old nineteenth century legal concepts of the prudent person test for investors as set out in the Chancery Division case of Re Whiteley (1886) and the classic legal definition of what is an “investment” as set out in the Chancery Division case of Re Wragg (1919) and instead move firmly into the twenty-first century.
Pension scheme investment is looking after many billions and even trillions of pounds, so it is time that the law is properly updated to reflect this rather than tinkering around the edges. When the Liz Truss budget struck in 2022, defined benefit pension schemes were left wondering whether specialist LDI investment vehicles designed for better managing defined benefit pension risk, were lawful as they could amount to “borrowing”. If pension trustees and pension providers are being asked by the Government to be more supportive of the UK in their pension investment strategy, the law needs to be crystal clear that this is a proper use of their investment powers.
Similarly, if pension investors, i.e. the ultimate individual members, are being rewarded for long term sustainable growth, they need to understand that they may lose some of that benefit if they move their pension pot from one scheme to another. They also need to understand whether the charges are higher for these types of investments - not every member may be willing to use their pension savings in these ways. Also, what happens if the pension scheme’s investments in UK PLC cuts across an individual member’s own views on, for example, environmental matters - how much picking and choosing will there really be for individual members?
There remain lots of questions about how the new system could operate so it’s not surprising that the round tables with the pensions industry have already started.
