The Chancellor, Rachel Reeves, delivered her highly anticipated first Mansion House speech to city leaders on 14 November 2024. Whilst her speech touched on a broad range of financial services policy, it was her announcements on pensions that drew the most attention from the industry. The overarching theme of the Chancellor’s speech centred around consolidation, investment led growth and a more proactive role for pension funds in supporting the UK economy.
This follows an Interim Report introduced under the Mansion House speech and two consultations:
- Pensions Investment Review: Unlocking the UK pensions market for growth; and
- Local Government Pension Scheme (England and Wales): Fit for the future.
Both consultations close for responses on 16 January 2025. Further to reviewing any responses to these consultations, the Government intends to introduce the new measures under the Pension Schemes Bill in 2025. Further regulations may be required to implement some of the Government’s proposals.
Furthermore, a Pensions Investment Review: Call for Evidence was run during September 2024 and an Interim Report published in November 2024.
The Chancellor’s speech focused on the following key areas:
- Consolidation of the defined contribution (DC) market
These proposals concern the consolidation of multi-employer DC schemes into “mega-funds“, similar to the schemes that exist in Australia and Canada, to achieve economies of scale. The expectation is that these larger funds will improve investment returns, reduce fees, and unlock millions for long-term investments in infrastructure, the “energy transition” and high growth businesses.
- Consolidation of the Local Government Pension Scheme (LGPS)
The Chancellor set out plans to streamline LGPS investments by consolidating the assets of the 86 LGPSs into 8 pools. Referring to the inefficiencies and fragmentation of the pensions landscape, the Government’s intention appears to be to merge these funds into larger investment pools, enabling a broader range of asset classes and reducing any duplication.
- A value for money framework
In her speech, the Chancellor refers to schemes delivering “better saver outcomes” and any investment coming with the “clear expectation of better value for money“. Her speech emphasises the importance of larger schemes which, with their enhanced resources, are inherently better positioned to deliver value for money (“VFM“). Crucially, the consultation on the pensions investment review asks for evidence of such measures, specifically a framework for DC schemes, “to shift the focus from cost to value, so that pension schemes are focussed on delivering for savers over the long term“. Clearly, the VFM framework currently in place will inform the Government’s measures and it will be interesting to see how this helps shape forthcoming legislation.
- UK investment
One overarching theme of the Chancellor’s proposals is around the role of pension funds in stimulating UK economic growth. The aim is to channel scheme investment, without mandating this, towards domestic infrastructure, technology and financing the transition to green energy. However, there has been caution in the pension industry’s response to the Government’s proposals in terms of whether schemes actually want to invest in the opportunities being presented, as well as ultimately using pension savers funds to drive economic growth. More clarity will be needed in due course around how the Government intends to balance the needs of pension savers with aspirations for a growing economy.
Environmental, social and governance considerations (“ESG”): State of play
Although the Chancellor refers to investing in “clean energy projects” and an “energy transition“, there is no specific reference to the social and governance factors of ESG, despite its greater role in financial and corporate governance over the past few years. There was also no mention of mandating ESG reporting for pension schemes or investment managers in relation to the new types of investment the Chancellor envisages. ESG is also largely absent from the above Interim Report and consultations. Whilst the drive towards investment in a broader range of asset classes may lead to some further green investment, the overall picture is not a positive one as far as ESG is concerned.
WB Comment
The Pensions Minister, Emma Reynolds, has stated that the proposed reforms could “unlock £80 billion of investment into exciting new businesses and critical infrastructure“. This statement underscores the Government’s ambition to mobilise pension fund capital as a catalyst for economic growth.
However, questions remain about the mechanisms and safeguards in place to achieve this. The industry’s cautious response reflects concerns about the risk-return balance for pension scheme members and the feasibility of investing such significant sums into relatively illiquid or untested asset classes. The absence of detailed frameworks addressing how funds will assess and integrate ESG considerations also raises doubts about the sustainability and governance of these investments. The requirement for “fewer, bigger, better run schemes” will not apply before 2030 at the earliest. The outcome of the above consultations will help set the course for legislation next year, but there are many unanswered questions around the viability of such reforms after successive changes in Government policy over the last few years.