At the chancellor’s annual Mansion House speech in July Jeremy Hunt set out wide-ranging reforms to Britain’s trillion pound pension sector that he said would “boost pensions (for savers) and increase investment in British businesses”.
Hunt claimed his so-called Mansion House reforms could deliver an extra £1,000 a year in retirement income for today’s young savers and unlock up to £75bn in pension savings to invest in the UK economy.
But the absence of pension reform from the government’s legislative programme in King’s Speech this week raised questions about whether the chancellor can deliver on his ambitions.
What are the Mansion House reforms?
A key plank of Hunt’s package was a voluntary agreement between nine of the UK’s largest defined contribution pension providers, which together hold a total of about £400bn in assets.
The agreement, dubbed the “Mansion House compact”, committed the providers to allocating 5 per cent of assets in their default funds, which are the most popular types of fund, to unlisted equities by 2030. According to the chancellor this could “unlock up to £50bn of investment into high-growth companies”.
Hunt also set out proposals to double the allocation of local government pension schemes in private equity to 10 per cent, which he said could unlock a further £25bn by 2030.
A range of separate reforms aimed to create bigger and better-run pension plans, which are more suited to investing in higher growth, higher risk assets, such as unlisted companies.
Among them was a controversial proposal for the state-backed pensions lifeboat fund to be given an expanded role as a consolidator of corporate pension plans, giving it a bigger pot of assets to invest in the economy.
Another potential plan was for employers to be given easier access to defined benefit pension fund surpluses to encourage schemes to invest in riskier assets that could help boost the economy.
Do the reforms need new legislation?
Some of Hunt’s changes require primary legislation, or a pensions bill, but others need only secondary legislation or guidance, say sector experts.
A bill would be needed to enact a new authorisation regime for new commercial defined benefit “superfunds”, which pool corporate pension fund assets.
The establishment of a clearing house to stop small pension pots that accumulate as people change jobs from getting lost in the system would also require legislation. The proposed registry could lead to a modest boost in pension incomes, according to analysis published alongside the Mansion House package.
While these two proposals predated the chancellor’s July speech, the package also contained newer ideas to boost investment by defined benefit pension schemes in what the government termed “productive finance”, which were also not mentioned in the King’s Speech.
Industry experts said they included proposals to ease access to defined benefit pension surpluses for employers that were still in the early stages of consultation.
Meanwhile, the Mansion House compact between defined contribution pension providers does not need legislation because it is voluntary, with the chancellor saying he would not force private sector funds to invest in specific assets.
Why was the pensions bill omitted from the King’s Speech?
One government official said the legislation was not included because of a lack of parliamentary time, and insisted that many reforms could be carried out quickly by regulators working with the sector.
However, some industry figures said the government could be reserving the big pension announcements for the Autumn Statement later this month.
“If the government was going to do something it might not have wanted to have spoiled the news on the 22nd, the Autumn Statement,” said David Robbins, senior consultant with WTW, the professional services firm.
He added: “The pensions stuff can be complicated and there may be some nervousness about how it will land” in an election year.
What is the industry view?
The absence of a pensions bill in the King’s Speech raised eyebrows among some in the pensions sector, especially as attention was given to legislation for issues such as unlicensed pedicabs in London.
“We were all a bit surprised,” said Matt Tickle, partner and chief investment officer at Barnett Waddingham, the actuarial consultants. “We were all expecting something given it was a big part of the government’s plans.”
LCP, one of the UK’s biggest actuarial consultant groups, said in a statement that the absence of pensions legislation could “severely limit what can be achieved this side of the general election”.
The group had previously put forward its own proposals to ease employer access to defined benefit surpluses as a route to stimulating funds to invest in higher growth, but higher risk assets, that mirror those floated by Hunt.
What next for the Mansion House reforms?
Government officials say steady progress is being made to deliver the reforms that do not require primary legislation.
Last month, 20 venture capital firms and an additional pension fund, Aon, agreed to join the Mansion House compact. The chancellor has also committed to respond to a raft of pension consultations linked to the reform package in his Autumn Statement.
The Pensions and Lifetime Savings Association, the industry trade body, said that while it was disappointing that the government did not include a pensions bill in the King’s Speech, “its absence will mean more time can be allocated to ensuring any reforms are well designed after in-depth consultation with the pensions sector”.