The pensions industry faces months of uncertainty and consultation following the Chancellor of the Exchequer Jeremy Hunt’s speech to City of London grandees at Mansion House on Monday evening.
He unveiled a wide range of proposals for reform that he said will channel up to £75bn of investment into what he argues are higher growth assets, writes Contributing Editor David Worsfold.
This will benefit the British economy and pensions savers, said Hunt:
“Our reforms will benefit savers and society by unlocking investment into pioneering UK business, growing the economy, and helping the record number of people in this country saving into a pension to achieve the retirement they want”. He said a typical earner could boost their retirement income by over £1000 a year if all the reforms are enacted.
At the heart of this plan is a “compact” already backed by nine of the UK’s largest pension providers to shift 5% of default funds into unlisted equities by 2030. The current industry average allocation to start-ups and unlisted equities is 0.5% and the Treasury estimates that if all funds follow suit up to £50bn could be released this way.
This central measure is surrounded by a series of proposed reforms to the Pension Protection Fund, the Value for Money framework, the role of the British Business Bank, proposals to drive the merger of DC and local government pension schemes and the role and training of trustees, all subject to separate consultations over the next few months.
There will also be a consultation on doubling the existing local government pension schemes’ investments into private equity to 10%, adding a further £25bn to the Chancellor’s hoped for further additional funds going into assets with potentially higher growth but which also carry higher risks – and, in the case of private equity, higher fees as several critics of the proposals have been quick to point out.
While the reform proposals were broadly welcomed, at least in principle, by most major players in the pensions sector, including the big asset managers, others believe they do not go far enough.
Former pensions minister Baroness Ros Altman, says it is potentially a missed opportunity to be more radical: "There is a potential for a win-win situation, boosting the prospects for British businesses, UK financial markets, the domestic economy, and society – while also delivering better risk-adjusted long-term returns for pension holders.
"The Local Government Pension Schemes are fully underwritten by taxpayers and just trying to unlock £25bn by 2030 also seems relatively unambitious.
"These pension funds could be harnessed to boost local housing projects across the country, to improve business conditions and infrastructure across the regions and still deliver good returns over time from a carefully constructed portfolio of assets spread across sectors and regions."
There are critics of the plans.
Tom Selby, head of retirement policy at AJ Bell, said: "While this desire to corral pension money into the UK economy is understandable, there is a danger hard-working savers will simply be forgotten about in all of this. It is also important the benefits and potential risks of these reforms are carefully explained to savers.
"Claims from the chancellor last night that the average DC pension saver will see their retirement pot increased by 12%, or £1000 a year, for example, as a result of greater levels of allocation to illiquid, high-risk investments are deeply concerning.
"It is, of course, possible that these assets will deliver greater returns than existing investments – but to suggest this with such certainty without mentioning the risks involved is dangerous."
The previous government emphasis on stimulating investment into infrastructure as part of a green recovery did not feature in the Chancellor’s Mansion House speech. The reforms to UK solvency rules for insurers remain the principal hope for realising that ambition.
It will be a busy summer for chief investment officers and their teams as they get drawn in to shaping the responses to Hunt’s blizzard of consultation.