On 10th July 2023, the Chancellor made a series of announcements in his Mansion House speech that may potentially have significant implications on both DB and DC pensions. We first reported on the Chancellor’s speech here.
The Mansion House Reforms
- 2/3rds of the UK’s DC workplace market, namely Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G & Mercer, have committed to allocate at least 5% of their default funds to unlisted equities by 2030. This agreement is known as the “Mansion House Compact”.
- The Chancellor has proposed fundamental changes to the way in which the Pension Protection Fund (“PPF”) operates, namely to use the PPF as a “permanent superfund” i.e. a consolidation vehicle for DB schemes by putting superfunds on a permanent legislative basis.
- The Department for Work and Pensions (“DWP”) has published its joint consultation response with the Pensions Regulator (“TPR”) and the FCA on the Value For Money framework. Schemes not achieving the best possible outcome for members will face being wound-up by TPR.
- The DWP and HM Treasury have launched a Call for Evidence focusing on: trustee skills and capability, the role of advice and barriers to trustee effectiveness including in relation to investment matters.
- The government will also consult on accelerating the consolidation of Local Government Pension Scheme (“LGPS”) assets by March 2025 for all LGPS funds to transfer their assets into local government pension pools.
- The Chancellor also raised some interesting questions about options for DB schemes including removing barriers to: i) the growth of surplus; and ii) possibly to the recovery of scheme surpluses.
The Mansion House Reforms were guided by the Chancellor’s ‘three golden rules’ aimed at unlocking investment potential and securing the best possible outcome for pension savers.
Such potential reforms are welcome news, given that nearly 90% of employees are reported to not be saving enough towards their retirement (as reported by the IFS here) and enhancing investment returns would assist. However, the Chancellor’s focus on schemes (and individuals) investing in “productive assets” which are not necessarily readily realisable may clash with existing legislation and case law relating to prudent investment.
PPF as a permanent superfund – the PPF is not backed by the government, rather it is funded by the PPF levy charged on DB schemes. Fundamentally changing the way in which the PPF operates would need to be done without risking the benefits of its members or increasing the cost for other DB schemes, particularly those that pay a PPF levy but would not participate in the new superfund.
Some have commented on the challenges faced by trustees and members on keeping up with the pace of the reforms to the regulatory landscape. For example, it was only a few months ago that the Spring 2023 Budget announced the abolishment of the lifetime allowance charge, other significant tax changes including to the annual allowance and the proposed dismantling from 6 April 2024 of the lifetime allowance framework (click here for the article in this Pensions Compass).
Reality check – many of the potential “Mansion House Reforms” would require Acts of Parliament and supporting Regulations. In what may turn out to be General Election year, we doubt whether the Government will have sufficient time to make much progress in 2024.
The Chancellor proposed using the PPF as a potential superfund and his other interesting proposals would require significant new legislation which is unlikely to see the light of day any time soon.
On 19 July 2023, the House of Commons Work and Pensions Committee (“WPC”) wrote to the DWP to highlight the ongoing investment potential of open DB schemes, i.e. DB schemes that have not closed to future benefit accrual. Where DB schemes remain open at a time when most have closed to accrual, this is often due to the sponsoring employer taking an active decision to keep them open on the grounds that the scheme continues to meet the needs of their workforce. The WPC points out that TPR encouraging open DB schemes to de-risk might not always be appropriate. Where a scheme remains open there may be more likelihood of long term investment in “growth” assets. The WPC’s letter chimes with the Chancellor’s Mansion House Reforms aimed at unlocking schemes’ investment potential.
On 10 August 2023, TPR revised its guidance on DB superfunds which can be found here and here. There are revisions to the so-called “gateway principles” that apply to schemes considering a transfer to a superfund. These principles require that a transfer should only be considered if the scheme is: i) unable to buyout; ii) there is no realistic prospect of buyout in the foreseeable future; and iii) the transfer improves the likelihood of members receiving full benefits. The “gateway principles” would apply to any transfers to the permanent superfund announced by the Chancellor, although legislating for permanent superfunds is a long way off. Meanwhile, TPR’s revised guidance is intended to fill the gap.
The Chancellor’s speech can be found in full here. If you have any questions regarding the Mansion House Reforms, please do not hesitate to contact a member of our team.