Will the Mansion House reforms deliver value for employees?


Need to know:

  • A raft of proposals have been launched to improve value for money in pension schemes.
  • The government’s big theme is to get more invested in private equity, which should boost the economy.
  • Poorly performing schemes could be forced to merge with better performing schemes.

In July, Chancellor of the Exchequer Jeremy Hunt proposed a number of pension reforms in his Mansion House speech, with an overarching focus on value for money for members. In total, there are nine separate papers. These include a new framework for comparing value for money in defined contribution (DC) occupational schemes, how to amalgamate deferred small pots, a better support structure for members during decumulation, a regulatory regime for defined benefit (DB) consolidators, or ‘superfunds’, the extension of multi-employer collective DC schemes, options for DB schemes and a call for evidence on trustee skills.

All calls for evidence and consultations closed on 5 September 2023, except a proposal to accelerate the pooling of local government funds which closed on 2 September.

Alyshia Harrington-Clark, head of DC, master trusts and lifetime saving at the Pensions and Lifetime Savings Association (PLSA), says: “The reforms include many elements aimed at extracting more value from our pensions savings system through a combination of increasing investment opportunities, encouraging schemes to achieve greater scale and making the system more efficient.

“The value for money framework will allow trustees and employers to make more meaningful comparisons between pension schemes, to the benefit of savers. The government’s consultation proposes simpler metrics than previously put forward, which should make it easier for schemes to provide the necessary information. The proposed framework also puts net saver outcomes first with greater emphasis on overall investment return rather than keeping down costs.”

Long-term gains

The Mansion House speech also focused on better returns over a longer period rather than focusing on short-term performance, which essentially means greater investing in unlisted  assets, such as private equity.  Indeed, Mel Stride, secretary of state for work and pensions, has been at pains to point out that, over a five-year period, there can be a 46% difference between the best and worst performing schemes. Some large schemes, including Aegon, Aviva, Legal and General, and Scottish Widows, have now promised to allocate at least 5% of their default funds to unlisted equities by 2030.

“Employers and schemes underperforming on these metrics should be on notice that the regulators are to be given greater powers to force laggards to wind up or merge with better performing schemes; one reason we believe the assessment of what constitutes a ‘better’ scheme is so important to get right,” says Harrington-Clark.

In particular, the aim is to encourage UK trustees to invest as much in unlisted equities as their European counterparts. However, the government did not provide past performance on unlisted equities to support its proposals, nor attempt to gauge whether there is sufficient capacity in the market.

Furthermore, there has been no discussion of whether the Occupational Pension Schemes (Investment) Regulations 2005 have deterred trustees from increasing allocations to unlisted assets. These regulations stress that trustees must invest predominantly in assets traded on regulated markets, and keep other holdings to prudent levels, but unlisted assets are neither publicly traded nor liquid.

Stephen Budge, partner and head of DC investment strategy at Lane Clark and Peacock (LCP), says: “The goal of better outcomes for savers seems to centre on the push into private markets with everything from trustee competence to public reporting now focused on what illiquid assets will deliver for members. It will be down to the industry to meet this challenge and deliver these improved strategy allocations across the board, rather than just a few innovative schemes.”

Retirement services

Trustees may also be forced to offer decumulation services to assist members at the point of retirement with better guidance and products, either offering these services in-house, or partnering with a supplier. This could potentially have significant impact on member outcomes.

Ros Altman, former pensions minister, says: “[Currently], standard auto-enrolment DC default funds for those nearing state pension age are not good value for money, since they are not checking what members plan to do. The schemes do not know whether the person is in bad health, will take cash, what date they may retire, whether they plan to keep paying into pensions, or go into drawdown rather than annuities or what other pensions they have. Depending on the answers, target date or lifestyling funds may be taking them out of higher return assets wrongly; and of course last year that was particularly disastrous as the supposedly ‘safe’ assets designed to protect capital ended up losing significant sums for those closest to retirement.”

A further consultation will look at establishing a central clearing house for deferred pots, with a handful of authorised schemes acting as consolidators, regulated by The Pensions Regulator (TPR). Deferred pots could number 27 million by 2035, according to research published by the Pensions Policy Institute in July 2020.