Pensions under the spotlight: reform, growth, and the road ahead

Pensions have received much attention since a new government was formed. In July, the government promised a “big bang of reforms to unlock growth” which then led to Labour unveiling a Pension Schemes Bill in the King’s Speech and a ‘landmark’ Pensions Review. We can’t forget the axing of the Winter Fuel Payment and the state pension increasing by £460 next year. This is only the beginning with further measures on pensions due to be announced in the upcoming Autumn Budget.

The most notable pensions announcement is the new government’s Pension Review, which was formally launched last month – a flagship review from the Chancellor, aiming to “boost investment, increase saver returns and tackle waste in the pensions system.”  

This review has been well-flagged by Labour, appearing in their manifesto. Given the tight fiscal situation and lack of funds to provide public spending, pension funds are now seen as the key area of finance by the government to boost investment in the UK and achieve its key mission of ‘kickstarting economic growth’. It is noticeable that the Pensions Review is being led by the Treasury and not the Department of Work & Pension, and the new pensions minister Emma Reynolds is also a joint Treasury minister. As Steve Webb, former pension minister noted that this could lead to a more cohesive approach to policymaking between the two departments, and an opportunity for decisions on pensions to take full account of the whole pensions landscape.

The government has a big task at hand, and it will need buy-in from the industry to kickstart its plans. In a recent PLSA report Pensions & Growth: Creating a Pipeline of Investable UK Opportunities, it outlined key recommendations to help create more investable opportunities in the UK. The PLSA called on the government to provide ‘policy and regulatory certainty to improve the UK’s appeal versus investment opportunities globally.’ Moreover, it suggested that the government should ‘offer targeted fiscal incentives to make UK growth assets more attractive’, and that the government should look to ‘expand the area of focus beyond private equity and venture capital to include infrastructure, alternative assets and a variety of funding models.’

Essentially for the government to achieve its aims, it will need to ensure its aims can be delivered working with companies and pension scheme trustees, who have a fiduciary duty to look after their members interest (not necessarily just to boost the UK economy). From a pensions fund perspective, this will mean that it will only invest where the risk-return characteristics of potential investments meet the needs of their members. Yet, ensuring greater investment in the UK economy while adhering to trustees’ fiduciary duty will be a tricky balancing act to maintain.

This also comes as recent news that UK pension schemes have among the lowest proportion of funds held in domestic stocks and private assets of any significant global pension market, according to study by think-tank New Financial. Just 4.4 per cent of UK pension assets are held in domestic equities, down from 6 per cent last year and much lower than a 10.1 per cent global average.

What we have seen so far is that the first stage of the Pension Investment Review’s ‘call for evidence’ focuses on Defined Contribution (DC) schemes and local government pension schemes (with a focus on Defined Benefit (DB) schemes to appear at a later date). Some of the key questions here focus on consolidation of schemes and incentives. An example is the call for evidence asks, “Is there a case for establishing additional incentives or requirements aimed at raising the portfolio allocations of DC and LGPS funds to UK assets or particular UK asset classes”. It will be interesting to see how the industry responds to the consultation which is due to close on 25th September.

As the pensions industry continues to navigate it ways in this new world, it will also be important for policymakers and the industry to look at the Australian and Canadian pension models more closely if the UK government want to deliver on their outcomes.