Annual dinner: The Chancellor, in his Mansion House speech, launched significant reforms to the pension system. He boldly claimed that these reforms would make the average saver £1,000 better off every year in retirement, thus using pensions as a tool to boost UK growth. The measures announced are aimed at unlocking billions of pounds of extra pension cash to support the economy. The industry’s response varied, with some calling for even more ambitious plans, while others expressed skepticism about the promised benefits for savers. While there are risks involved, there was overall support for the Chancellor’s goal to increase UK growth. In this article, we will explore the proposed changes and their potential impact on the economy and retirement savings.
1. The ‘Mansion House Compact’ was signed by nine of the largest defined contribution pension providers. This agreement requires them to allocate 5% of their default funds to unlisted equities by 2030. The participating providers include Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pensions, M&G, and Mercers. If all UK defined contribution pension schemes follow suit, this could unlock up to £50 billion of investment in high-growth companies by 2030.
2. A new Value for Money Framework will ensure that investment decisions made by pension firms are based on overall long-term returns rather than just costs. Schemes that fail to achieve the best outcomes for members will be merged into larger, better-performing ones.
3. The British Business Bank will explore the possibility of the government playing a greater role in establishing investment vehicles to support UK growth. This complements the £250 million already made available through the Long-term Investment for Technology and Science (Lifts) initiative.
4. The introduction of new Collective Defined Contribution funds, which are a hybrid between final salary and defined contribution pensions, will be encouraged. These funds can pool assets and potentially invest more effectively.
5. There will be a consultation on whether Local Government Pension Schemes should double their investments in private equity to 10% and potentially unlock £25 billion by 2030. The consultation proposes a deadline of March 2025 for all Local Government Pension Scheme funds to transfer their assets into LGPS pools and aims for each pool to exceed £50 billion of assets.
6. The government plans to establish a permanent ‘superfund’ regulatory regime to help employers and trustees manage defined benefit pension liabilities. A consultation will also be launched on how defined benefit schemes and the Pension Protection Fund can contribute to productive investment while protecting savers’ interests and the effectiveness of the UK government bond market.
According to the Treasury, these reforms could increase pension pots for average earners who start saving at 18 by 12% over their careers, resulting in over £1,000 more per year in retirement. This supports the UK economy, businesses, and jobs. The Chancellor’s reforms are guided by three golden rules: securing the best outcomes for pension savers, prioritizing a strong and diversified gilt market, and strengthening the UK’s position as a leading financial center.
Pension experts, including former Pensions Minister Ros Altmann, urge the Chancellor to be bolder in ensuring that domestic pension funds are used to boost British growth. They argue that with mounting fiscal deficits and diminishing support for UK assets, it is time for a revolution in directing more funds towards the domestic economy. They also suggest that Local Government Pension Schemes could be harnessed to boost housing projects and improve regional business conditions and infrastructure. However, caution is advised, as making definitive claims about enhanced returns carries inherent uncertainties.
In conclusion, the Chancellor’s pension reforms aim to leverage the potential of pension funds to boost UK growth. While there is support for his overall goal, the industry calls for greater ambition and caution in these initiatives. The impact will depend on the ability to achieve the promised returns and manage the associated risks.
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