Nine of the UK’s largest defined contribution (DC) pension providers have come to an agreement with the government to improve pension schemes.
Under the Mansion House Reforms, announced by Chancellor of the Exchequer Jeremy Hunt, the providers have committed to allocating 5% of assets in their default funds to unlisted equities by 2030, which could lead to a 12% uplift in outcomes for DC savers, or up to £16,000 for an average earner. This could unlock up to £75 billion of additional investment from DC and local government pensions.
The Chancellor also outlined plans to deliver better returns for savers through a new value-for-money framework, which will ensure that investment decisions made by pension firms should be based on overall long-term returns and not just costs. Pension schemes that are not achieving the best possible outcome will be combined into larger, better performing plans.
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Additionally, the government will encourage collective defined contribution (CDC) funds that can invest more effectively by pooling assets. It will also launch a call for evidence to explore how to support pension trustees to improve their skills, overcome cultural barriers and realise the best outcomes for pension schemes and their members.
Hunt said: “British pensioners should benefit from British business success. By unlocking investment, we will boost retirement income by over £1,000 a year for typical earner over the course of their career. This also means more investment in our most promising companies, driving growth in the UK.”
Mel Stride, secretary of state for work and pensions, added: “British workers should have the confidence that their pension savings are working as hard as they are. Our reforms will benefit savers and society, unlocking investment into pioneering UK businesses, growing the economy, and helping the record number of people in this country saving into a pension to achieve the retirement they want.”
Paul Waters, head of DC markets at Hymans Robertson, said: “It is great to see the Chancellor recognise the value DC pensions can play for the UK economy and the need for innovation like CDC to drive better member outcomes. There are alternative forms of risk sharing that could materially deliver better outcomes for savers in different situations. These have the potential to deliver more value to savers, at arguably lower long-term risk, and can be implemented today.
“We must ensure we design and deliver the best solutions for all members, not focus on one which could be just average for many. However, we need to stop the race to the bottom on charges and make sure the positive case for delivering better value is heard. Value and outcomes should drive decisions, not cost.”