UK Pension Reforms Aim to Boost Pensions, Local Business

The U.K. government has launched a proposal to reform the country’s pension system in a move aimed at boosting retirees’ nest eggs, while also providing a shot in the arm to the British economy by increasing pension funds’ investments in local businesses.

In a July 10 speech at Mansion House, the official residence of the Lord Mayor of London, U.K. Chancellor of the Exchequer Jeremy Hunt touted the new reforms, saying that for someone who starts saving at 18, the measures could increase the size of their pension savings by 12% over their career, which he said is worth more than £1,000 ($1,307) per year in retirement.

“At the same time, this package has the potential to unlock an additional £75 billion of financing for growth by 2030, finally addressing the shortage of scale-up capital holding back so many of our most promising companies,” Hunt said in the speech.

Among the government’s proposals, which have become known as the Mansion House reforms, is the intended consolidation of a “fragmented market” of more than 5,000 defined benefit plans via the introduction of a permanent superfund regulatory regime to provide sponsoring employers and trustees with a new, scaled-up way of managing liabilities.

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Last week, the U.K. government also published its response to a consultation that began in December 2018 seeking views on a legislative framework to authorize and regulate defined benefit “superfund” consolidation plans.

“The vast majority of the responses to the consultation were supportive of the proposals and keen to see superfunds up, running and regulated in the U.K.,” Laura Trott, the Parliamentary Under-Secretary of State for Pensions, wrote in the foreword of the government’s response. “Setting up this system will ensure that superfunds operate on a secure footing and support scheme members so they can confident that their position is being enhanced by this form of consolidation.”

Trott also said superfunds have the potential to improve the likelihood of participants getting their benefits in full, while providing employers with “a new, affordable way to manage their legacy pension liabilities.” She adds that superfunds provide the benefits of scale, significant new capital and a well-diversified portfolio to contribute to greater investment in assets that support U.K. business.

“They align with wider government initiatives designed to stimulate economic growth and will provide access to new sources of capital investment for U.K. firms, major infrastructure projects, and other illiquid type investments,” Trott wrote.

Under the reforms, a consultation will also be launched for the Local Government Pension Schemes, a national pension for local government workers, to double existing investments in private equity to 10%. The consultation proposes a deadline of March 2025 for all LGPS funds to transfer their assets into LGPS pools and sets a direction that each pool should exceed £50 billion of assets.

The U.K.’s Department for Work and Pensions announced it wants to build an evidence base to show how defined benefit plans could increase the amount invested in alternative asset classes without exposing the plans to too much risk. This includes exploring the prospect of more investment that provides equity capital and finance for U.K. businesses, such as start-ups, infrastructure and private equity, as well as longer-term investments, typically in illiquid assets.

“These reforms support our ambition for pension savers to be in large, well-run schemes that deliver good outcomes at every stage of their retirement journey,” Nausicaa Delfas, chief executive of The Pension Regulator, said in a statement. “They will drive a long-term focus on value, encouraging schemes to invest in the full range of asset classes to deliver higher returns for savers.”