Rachel intends to establish mandatory pension investments within proposed megafunds launch
The UK government is set to implement binding allocations in pension funds as part of its plans for the launch of megafunds. This initiative aims to stimulate fresh investment in the country's infrastructure and businesses.
The Pension Schemes Bill, to be unveiled soon, will give ministers the authority to set binding asset allocation targets for pension funds. This move is intended to ensure that individual schemes do not lose opportunities in the private markets, which offer higher returns albeit at a higher upfront cost.
However, the decision is likely to spark dissent among pension funds, who had previously expressed steadfast opposition to mandatory asset allocations prior to the signing of the Mansion House Accord, a voluntary scheme to increase investment in private assets.
Sir Nicholas Lyons, chairman of Phoenix Group, who spearheaded an earlier version of the pact signed by major pension funds in 2023, has taken issue with mandation. During an event at the Guildhall in April, Lyons emphasized the need for private-sector entities to decide the best investment strategies. His sentiments were echoed by British Business Bank CEO Louis Taylor, who suggested other ways to incentivize investments without strict mandation, which might belied an open economy.
Lyons proposed that the government retain the threat of mandation to urge concentration among stakeholders. Meanwhile, Gareth Davies, Shadow Financial Secretary to the Treasury, suggested that the imposition of mandated investments stems from the chancellor's poor choices, resulting in the need to compel pension funds to invest in unattractive UK-based assets.
The development comes as the chancellor outlines the creation of pension megafunds. These are expected to be operated by all multi-employer Defined Contribution pension schemes and Local Government Pension Scheme pools, managing at least £25bn in assets by 2030. Australia and Canada have already implemented similar steps in an effort to reverse the gradual decline in domestic investment from UK pension funds, where around 20% of Defined Contribution assets are currently invested compared to over 50% in 2012.
It is estimated that the creation of megafunds could save up to £2bn annually through economies of scale and improved investment strategies. The average earner saving over their career could potentially see a £6,000 increase in their Defined Contribution pension pot as a result.
Angela Rayner, Deputy Prime Minister, stated that the untapped potential of the £392bn Local Government Pension Scheme is vast. Through these reforms, she asserted, growth and opportunities will be fostered in communities across the country for years to come, fulfilling the government's Plan for Change.
In a relaxation of earlier proposals, the Treasury has confirmed that schemes worth over £10bn that fail to reach the minimum size requirement by the end of the decade will be allowed to continue operating, provided they can demonstrate a clear plan to reach £25bn by 2035.
The Pension Security Alliance, a coalition of businesses, campaigners, and pensions professionals, has raised concerns about the proposals allowing surplus money to be extracted from pension schemes. According to the alliance, more than 10 million members and beneficiaries of private-sector DB pensions must be consulted about any changes that could endanger their pensions.
Dennis Read of alliance member Silver Voices expressed worry about the government's plans to permit companies to extract funds from pension schemes to facilitate investment and growth. He argued that these plans could jeopardize the future pensions of employees and retirees, particularly at a time when retirement security is crucial. He also warned against reoccurring situations like the collapse of some pension schemes due to hasty withdrawals of funds under new government proposals.
The Pension Schemes Bill, when introduced, will enable ministers to impose binding asset allocation targets for pension funds in the finance sector, aiming to stimulate investments in the UK's economy and business, particularly in private markets. This mandate, however, has raised concerns amongst pension fund managers, who associate mandatory asset allocation with potential risks and restrictions that could hinder optimal investment strategies.
