The Chancellor’s Mansion House Speech 14 November 2024 – “the biggest set of reforms to the pensions market in decades”

Last night, 14 November 2024, the Chancellor delivered her Mansion House speech. Announcing bold action to tackle the fragmented pensions landscape, deliver investment and drive economic growth, Rachel Reeves emphasized the importance of the financial services sector in the government’s growth strategy.

The core elements of this strategy are:

• Stability: Ensuring economic stability to boost business confidence and investment.
• Investment: Attracting global and private investment to spur innovation and economic growth.
• Financial Services Growth Strategy: Developing a strategy to enhance the sector’s competitiveness.
• Pensions Investment Review: Proposing consolidation of the pension system to create “pension megafunds”, unlocking £billions for infrastructure and local projects.
• Sustainable Finance: Creating a framework for green investments and economic growth.

According to the government press release issued on the day before the Chancellor’s speech, DC pension schemes are set to manage £800 billion worth of assets by 2030. There are currently around 60 different multi-employer schemes, each investing savers’ money into one or more funds. In her speech the Chancellor said, “We will deliver a significant consolidation of the Defined Contribution market to enable schemes to deliver better saver outcomes while investing to support growth.”

According to the interim report on the Pensions Investment Review, there are over 1,000 DC pension schemes with 12 members or more, including around 30 authorised Master Trusts (MTs) and 30 providers of contract-based workplace pension schemes (e.g. Group Personal Pensions (GPPs)). The vast majority of savers are now within these multi-employer arrangements, with around 10 million active savers in Master Trusts and around 6 million active savers in workplace contract-based arrangements. If this rate of consolidation were to continue, it could mean the number of DC trust-based schemes falling to just over 500 by 2030. There is also ongoing expansion in this market, and it is projected, for instance, that the trust-based market could grow from around £140 billion in 2023 to about £400 billion in 2030 in real terms and that overall assets in DC workplace schemes could grow to about £800 billion.

The government has opened a consultation on proposed measures aimed at consolidating the DC market into fewer, larger funds, enhancing their ability to invest in productive assets and deliver better returns for members. These megafunds must meet rigorous standards and will be authorized by the Financial Conduct Authority (FCA). The consultation does not explain what The Pension Regulator’s (TPR) role will be going forwards. It currently also regulates Master Trusts.

To support this, proposals include:

• Allowing transfers without consent into trust-based schemes, while ensuring member protections.
• Enabling contractual overrides for contract-based pension arrangements with appropriate protections that would be set out in FCA rules and possible revised requirements for receiving trustees. 
• Multi-employer DC schemes used for Auto Enrolment (AE) should have a maximum number of defaults.
• Multi-employer DC schemes’ defaults should operate at a minimum size of Assets Under Management (AUM). According to paragraph 44 of the consultation on reforms to the DC pensions markets “Although there is no conclusive evidence of optimal size of AUM at default fund level in DC pension schemes, a number of papers suggest a greater number of benefits can start to arise at £25bn-£50bn (or greater), including on in-house investments, access to wider asset classes, and other scale benefits.”
• DWP would need to work with TPR to amend the relevant regulations and guidance on transfers, it is likely to require an amendment to the Financial Services and Markets Act 2000, and the government is considering whether the FCA may need additional powers to monitor and enforce this.

The consultation also explores differential pricing in a consolidated market and seeks input on encouraging employers and advisers to prioritize value in workplace pensions. There is also a chapter on the role of employers in a more consolidated market and whether those who advise them should be subject to more oversight.

We note that several Master Trusts concentrate on sustainability and we wonder if there will be any carve-out for these on consolidation as they have a very specific role to play.

There are also proposed reforms to the Local Government Pension Scheme (LGPS) in England and Wales, which is one of the world’s largest funded pension schemes, managing the pensions of 6.7m members and investing £392 billion worldwide, as at March 2024. Currently, these assets are divided among 86 Administering Authorities, each managing between £300 million and £30 billion. Since 2015, these 86 administering authorities have managed their investments through 8 LGPS asset pools.

The consultation notes the LGPS is set to manage around £500 billion in assets by 2030. This scale makes it a significant investor with the potential to boost growth across the UK. It comments that the LGPS’s core duty is to make long-term stable returns to pay the pensions of those who have delivered vital local services. At present, however, the government considers that the LGPS does not reach its full potential as an investor and engine of growth due to the fragmented nature of the scheme, and inconsistent standards of governance.

Taking inspiration from the pensions systems in Australia and Canada, the government hopes that pooling assets from the LGPS will boost investment in new businesses and critical infrastructure while improving pension outcomes for 6.7 million public servants, many of whom are low-paid women savers. 

For the LGPS to adapt to future challenges and maximise its success, the government believes that all its funds and pools will need to adopt an operating model that meets the following minimum standards:

• Administering Authorities would remain responsible for setting an investment strategy for their fund and would be required to fully delegate the implementation of that strategy to the pool.
• Administering Authorities would be required to take principal advice on their investment strategy from the pool.
• Pools would be required to be established as investment management companies authorised and regulated by the FCA, with the expertise and capacity to implement investment strategies. Currently only five of the eight use this model. 
• Administering Authorities would be required to transfer legacy assets to the management of the pool.
• Pools would be required to develop the capability to conduct due diligence on local investments and to manage such investments.

The government considers that this approach to consolidation should free up money for local public services in the long term and secure more than £20 billion for investment in local communities. This is supported by the interim report of the Pensions Investment Review: larger pension schemes, managing between £25-50 billion, can achieve higher productive investment levels and invest in a broader range of assets. Governance of the LGPS will also be improved to enhance investment value. There will also be an independent review process will ensure all 86 Administering Authorities are effective.

The Government have already announced plans for a Pensions Schemes Bill 2025 which should contain more detail on all their proposals. Following the conclusion of the consultation on consolidating DC schemes, the Government intends to legislate to allow fund managers to move savers more easily from underperforming schemes to ones that deliver higher returns for them. 

Other measures announced at the Mansion House last night are:

• National Wealth Fund: The UK Infrastructure Bank will become the National Wealth Fund (NWF), headquartered in Leeds, aiming to attract significant private investment for clean energy and growth industries. With £27.8 billion, the NWF will support investment plans with industry partners and mayors. It will have an expanded mandate, to broaden the NWF’s scope beyond infrastructure. Alongside this the NWF will trial new finance solutions to maximize private investment.
• British Business Bank: Changes will increase the British Business Bank (BBB) impact and flexibility, making its £7.9 billion commercial programs permanent.
• British Growth Partnership: This initiative will allow and institutional investors to co-invest in innovative companies, aiming to raise hundreds of millions by 2025.

• PISCES: Chancellor Rachel Reeves announced a UK private stock market called Pisces, allowing shares in private companies to be traded. This platform aims to boost the UK market and support future public listings, acting as a bridge between public and private markets. Transactions on Pisces will be exempt from stamp duty.

Comment: Overall, this is a positive direction of travel. Enabling DC schemes to transfer members without consent removes a major barrier preventing smaller DC schemes from consolidating. But only halving the number of DC schemes may not be enough to achieve the outcomes the government is looking for.

For the LGPS changes, the FCA authorisation seems a significant shift for Northern LGPS, Wales Pension Partnership, and ACCESS, which currently do not require separate regulatory approval.

We also welcome the FCA’s announcement on 15 November 2024 that, in response to feedback,  it will consult on changes to try to close the pensions advice gap. It aims to provide “high-level proposals” in December 2024 for targeted support for pension savers s part of its Advice Guidance Boundary review.