Chancellor Jeremy Hunt has called for consolidation in the defined benefit pensions space.
During his Mansion House speech this evening (10 July), Hunt said the DB landscape is “too fragmented”, with more than 5,000 schemes operating under a different regulatory regime from defined contribution pensions.
“I recognise the important role played by insurers offering buy-out to schemes, which will continue to be an essential part of the way we improve security for pension members in this market,” he said.
“But in addition, we will set out our plans on introducing a permanent superfund regulatory regime to provide sponsoring employers and trustees with a new way of managing DB liabilities.”
He said the government has “engaged closely with a range of experts” and will launch a call for evidence tomorrow (11 July) on the role of the Pension Protection Fund and the part DB schemes play in productive investment.
He also spoke about defined contribution pension funds which, in the UK, now invest under 1% in unlisted equity. This compares with between 5 and 6% in Australia.
“Currently we have a perverse situation in which UK institutional investors are not investing as much in UK high-growth companies as their international counterparts,” said the chancellor.
“At the same time on their current trajectory, some defined contribution schemes may not provide the returns their pension fund holders expect or need.
“Whilst many defined benefit funds are in surplus, their returns are lower than some international peers and some are still underfunded.”
Tomorrow, the DWP will publish its joint consultation response with the Pensions Regulator and the FCA on the Value For Money framework.
This will clarify that investment decisions should be made on the basis of long-term returns and not simply cost.
Hunt also said that pension schemes which are not achieving the best possible outcome for their members will face being wound up by the Pensions Regulator.
“We will also set out a roadmap to encourage ‘Collective DC funds’ – a new type of pension fund which we believe holds great promise for the future.”
The announcements are all part of a package of measures aimed at “unlocking capital and boosting outcomes for pension savers”.
Hunt said these ‘Mansion House Reforms’ could increase defined contribution pension pots by up to 12%, or as much as £16,000 for an average earner.
“Today I am pleased to announce that the Lord Mayor and I joined the CEOs of many of our largest DC pension schemes – namely Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pension, M&G & Mercer – for the formal signing of the ‘Mansion House Compact’,” said Hunt.
“The Compact commits these DC funds, which represent over two-thirds of the UK’s entire DC workplace market, to the objective of allocating at least 5% of their default funds to unlisted equities by 2030.
“This could unlock up to £50bn of investment into high-growth companies by that time if the rest of the UK’s DC market follows suit.”
The Association of Consulting Actuaries warned that unlocking the 12% additional lifetime returns for DC savers quoted by the chancellor “relies not just on an evolution in pension scheme investment approaches, but also on a step change in the domestic investment opportunities that are available”.
“Otherwise, pension scheme members will simply be being asked to take on additional risk,” it added.
It also said it “does not support proposals” which would compulsorily require schemes (DB or DC) to hold particular asset classes, or which would require schemes to consolidate involuntarily.
