Government Pension Reforms

Chancellor Rachel Reeves recently announced plans for major reforms to UK pension schemes, described as “the biggest pension reform in decades”, with possible implications for both UK public sector pension funds and private sector pensions.

These plans formed a key part of her first Mansion House speech as Chancellor, which is the annual address given by the incumbent Chancellor to senior bankers and financial industry leaders at the Annual Financial and Professional Services Dinner.

Typically, this speech is used to indicate future plans for the industry and is closely watched by those wanting to keep a close eye on the Government’s next steps.

What is the Government trying to achieve?

Through these reforms, it seems that the Government is seeking to achieve two objectives in particular;

• To increase investment in UK projects / businesses to help stimulate economic growth; and
• To increase returns on savings for UK pensioners

It is understood that the Government will not mandate where the funds will be invested, but it is hoped that a significant proportion will naturally end up invested in UK-based projects and growing businesses.

Some savers may find the framing of these reforms unsettling, as in the first instance they appear to be promoted as a vehicle for economic growth, rather than looking primarily at the needs of savers.

What are the plans?

According to the official Government press release, the reforms, (which will be introduced through a new Pension Schemes Bill in 2025) will merge the 86 Local Government Pension Scheme assets, and consolidate defined contribution schemes into ‘megafunds’.

It is understood that smaller defined contribution schemes from private businesses across the UK would also be pooled into funds of £25bn to £50bn

These megafunds would reflect set-ups in Australia and Canada, where pension funds take advantage of size to invest in assets that have higher growth potential. The Government hopes that this could deliver £80 million of investment in new businesses and critical infrastructure, while boosting the pension pots of defined contribution savers.

Are these new ideas?

It should be clarified that these plans are not exactly ‘new’ ideas from a UK government perspective, with the previous Conservative Governments proposing similar reforms in the last decade, most notably so with David Cameron in 2015, and Chancellor Jeremy Hunt as recently as Autumn 2023. It would seem that the fact that these reforms have cross-party support, at a time when UK politics is increasingly polarised, this would suggest that this is not altogether a terrible idea.

What opportunities might Megafunds offer?

The idea is that the larger the fund, the larger the sums of money that can be invested, into a wider range of both higher risk and longer-term assets, increasing the chances of improved returns for savers.

These pooled funds would be managed by professional investors, which should in turn help to cut costs by reducing fees paid to the various teams of advisers / lawyers / asset managers employed by individual firms each year.

What are the issues?

Risk and reward is inherent in all investments, and any investment decision should be defined through the investor’s attitude to risk, capacity for loss, and their need for returns.

Pension savers across the UK will all wish to see good returns on their investments in order to support a comfortable retirement, and in this regard the proposed reforms could be seen as a positive move.

However, not all savers will have the same attitude to risk, and an individual’s capacity for loss on their pension funds will change throughout their working lives. For instance, a saver in the early part of their career would be more likely to accept their funds taking a significant hit, as there would be plenty of time for them to recover before they retire. Conversely, a saver who may be looking to retire imminently would have less capacity for loss, as there would be less time for their funds to recover in the event of any significant losses.

These Canadian / Australian models often have a higher proportion of their funds invested in higher risk assets such as private equity, with a lower proportion held in assets that are typically less volatile, such as Government bonds or shares in listed companies.

Such investments come with particular risks, that not all savers have an appetite for. A key example of such investments going wrong is the Ontario Municipal Employees Retirement Scheme, who invested into utility provider Thames Water.  Well-documented financial issues have led the pension fund to reduce the value of its 31.7% stake in the parent company of Thames Water to zero.

Undoubtedly, there will also be plenty of examples of success stories of these funds, whereby investments into higher risk assets provide the returns that investors hoped they would. But given the nature of our news and media cycle, which tends to focus on the negative, we are less likely to hear about such stories.

Implications?

As ever with these things, the devil will be in the detail, and given that the Bill will not be officially introduced to Parliament until next year, there is time for some of this detail to change.

Solomon’s will be on hand to support all our clients through whatever comes of these reforms; so if you have any questions or concerns – please let us know.