On 10 July, the government announced a package of reforms designed to improve the functioning of capital markets in the UK. The reforms cover three main areas: pensions, company listings and regulation. In relation to pensions, the reforms will be guided by three “golden rules”:
- To secure the best possible outcome for pension savers.
- To always prioritise a strong and diversified gilt market by seeking to deliver an evolutionary, rather than revolutionary, change in the pensions market.
- To strengthen the UK’s position as a leading financial centre to create wealth and fund public services.
The Mansion House Compact
Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G and Mercer, who together represent around two-thirds of the UK’s DC workplace pensions market, have committed to the objective of allocating at least 5% of their default funds to unlisted equities by 2030. The hope is that the rest of the DC market will follow suit, which could unlock up to £50 billion of investment into high growth companies.
The government will facilitate a programme of DC consolidation to ensure that schemes are able to maintain a diverse portfolio of bonds, equity and unlisted assets and deliver the best possible returns for members. A new value for money (VFM) framework will be introduced which will make it clear that investment decisions should be based on overall long-term returns and not simply costs. Schemes which are not achieving the best possible outcome for their members will be wound up and their assets transferred into larger, better performing schemes. For more information, please click here.
In addition, the government is setting out a roadmap to encourage the establishment of collective DC (CDC) schemes. The government will extend the CDC regime to allow the establishment of non-associated multi-employer CDC schemes. It is also committed to extending the CDC regime to allow decumulation-only schemes and will continue to explore how these schemes might operate.
To ensure that schemes have access to a wide range of investment vehicles that enable them to invest quickly and effectively in unlisted high growth companies, the British Business Bank1 will explore the case for the government to play a greater role in establishing investment vehicles. This will complement the £250 million of support that the government is making available through the Long-Term Investment for Technology and Science (LIFTS) initiative to incentivise new industry-led investment vehicles.
Other DC-related announcements
Although not referred to in the announcement, the government is also consulting on:
- Proposals for the introduction of a default consolidator solution for dealing with small deferred DC pots. Under the proposals, schemes would be required to transfer DC pots of £1,000 or less which have been deferred for at least 12 months into one of multiple default consolidator schemes. A central clearing house would notify the scheme of the consolidator to which the transfer should be made. The consultation closes on 5 September 2023.
- A framework to support members of DC occupational pension schemes in their decumulation choices by requiring trustees to offer decumulation solutions to members – for more information, please click here.
While insurer buy-out will continue to be an essential part of improving security for members of DB occupational pension schemes, the government will introduce a statutory regime for the compulsory authorisation and supervision by The Pensions Regulator (TPR) of DB superfunds and other consolidation models. The new regime will be introduced as soon as parliamentary time allows. In the meantime, DB superfunds will continue to need to meet the requirements of TPR’s interim non-statutory regime.
The government is also exploring the possible role of the Pension Protection Fund and the part that DB schemes could play in productive investment whilst still securing members’ interests. For more information, please click here.
The government has launched a call for evidence to look at trustee skills and capability and to explore how barriers to effective decision-making can be overcome and a focus on good member outcomes ensured. For more information, please click here.
How we can help
In addition to keeping trustees and employers updated on the progress of the reforms, we can advise on the implications of the reforms for them and their pension schemes. We can also provide training on the reforms.